SHANGHAI: Weakness in China’s yuan gathered pace on Friday, putting the currency on track for its biggest monthly drop since 1994, pressured by broad dollar strength and lockdowns in many major cities to curb the spread of COVID-19.
Global investment houses rushed to cut their yuan forecasts, with optimism souring amid China’s sharp economic slowdown and expectations for aggressive US interest rate rises starting next week.
The pace of yuan depreciation accelerated after both onshore and offshore yuan, breached the psychologically important 6.6 per dollar mark, while the central bank has yet to show much apparent discomfort over recent losses.
Prior to the market opening, the People’s Bank of China (PBOC) set the midpoint rate at a 1-1/2-year low of 6.6177 per dollar, 549 pips or 0.83% weaker than the previous fix of 6.5628.
But analysts and traders said the official guidance rate mostly came in line with market projections. Any big discrepancies between their forecasts and the PBOC’s fixing are closely watched by investors for clues on possible shifts in foreign exchange policy.
China’s yuan slips to late 2020 lows as dollar surges, economy wobbles
In the spot market, the onshore yuan opened at 6.6080 per dollar and weakened to a low of 6.6520 at one point in morning trade, the weakest level since Nov.5, 2020.
By midday, it was changing hands at 6.6450, down 195 pips or about 0.3% from the previous late session close, while its offshore counterpart traded at 6.6777 per dollar.
If the onshore yuan ends the later session around midday levels, it would have lost 4.3% for the month.
“We do sense a shift in market bias from sell on upticks to buy on dips for USD/CNH,” Citi analysts said in a note.
“We acknowledge that a sharp crash in RMB CFETS is unlikely without the trade balance coming off sharply or service deficit widening with a vengeance. But with the broad USD strengthening sharply, USD/CNH can push towards 6.80-6.85 zone.”
The Yuan CFETS basket index, a gauge that measures the yuan’s value against its major trading partners, stood at 103.24, up 0.76% so far this year.
That compared with spot yuan’s year-to-date loss of 4.4% to the dollar, with most of the decline taking place over the past two weeks.
Worries over wider disruptions to economic activity continued to weigh on the yuan as China’s capital Beijing closed more gyms, malls, cinemas and apartment blocks on Friday, with authorities ramping up contact tracing to contain a COVID-19 outbreak, while public resentment over a draconian month-long lockdown in Shanghai continued to grow.
Some currency traders said recent sharp losses in Japanese yen also added downside pressure on non-dollar currencies including the yuan.
However, sentiment stabilised slightly around midday, after state media quoted the Politburo, a top decision-making body of the ruling Communist Party, as saying that China will step up policy adjustments to stabilise the economy as risks increase.
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