SHANGHAI: China’s yuan breached the key threshold of 6.9 per dollar early on Monday, after Federal Reserve Chair Jerome Powell signalled interest rates would be kept higher for longer to bring down soaring US inflation.
Powell’s hawkish remarks at Jackson Hole on Friday pressured the Chinese currency, despite the central bank setting a firmer-than-expected midpoint fixing, that was seen by the market as an attempt to lean against the yuan’s recent weakness.
The yuan has lost more than 2.5% to the dollar so far this month, on course for the biggest monthly drop since April when strict COVID-19 lockdowns in various Chinese cities, including the financial hub of Shanghai, heightened worries over economic growth in the world’s second-largest economy.
Prior to market opening, the People’s Bank of China (PBOC) set the midpoint rate at 6.8698 per dollar, 212 pips or 0.31% weaker than the previous fix 6.8486 and the weakest since Aug. 28, 2020.
But Monday’s fixing came in much stronger than market expectations. It was 101 pips firmer than Reuters’ estimate of 6.8799.
Market participants have been closely monitoring the daily guidance for hints about the authorities’ position on the yuan. A firmer-than-expected fixing could mean they are getting increasingly uncomfortable with the currency’s decline.
But the fixing failed to stall selling, with both the onshore and offshore yuan quickly breaching the psychologically critical 6.9 per dollar level in early Asian trade.
Yuan set for second weekly loss
The onshore yuan opened at 6.8990 per dollar and fell to 6.92 at one point, the weakest since Aug. 24, 2020. It last traded at 6.9132 by 0222 GMT.
Its offshore counterpart followed suit and weakened to a two-year low of 6.9308 per dollar in early deals before trading at 6.9247 as of 0222 GMT.
“The next target for the yuan could be 7 per dollar,” said a trader at a foreign bank.
Traders and analysts said a surging dollar, domestic economic slowdown and China’s apparent monetary easing bias to support the economy weighed on the currency.
“RMB weakened further on the back of rising yield differential between China and the U.S.,” said Tommy Xie, head of Greater China research at OCBC Bank, noting regulators will likely monitor trends and keep the volatility in check.
Several traders said major state-owned banks, which usually trade on behalf of the central bank, have not yet stepped into the market to stem the yuan’s fall.
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