China’s yuan weakens further on COVID, growth woes

SHANGHAI: China’s yuan weakened further on Tuesday, after hitting a two-year low the previous session, as pressure from a broadly strong dollar was exacerbated by fresh local COVID-19 outbreaks and a gloomy economic growth outlook.

Overall, however, traders expect the currency’s depreciation to slow amid signs China’s central bank is seeking to moderate the yuan’ sdeclines.

Onshore yuan was changing hands at 6.9168 at midday, 74 pips away from the previous late session close, and 0.53 percent weaker than the midpoint, which was set by the People’s Bank of China (PBOC) at a two-year low.

But the yuan’s mid-point was stronger than the Reuters’ forecast, repeating a recent pattern in what traders believe is a sign the PBOC wants to prevent the yuan from declining too rapidly.

The yuan has fallen more than 8% against the dollar so far this year.

“This would be the fifth consecutive day of strong fixing signal to stabilize the yuan,” Maybank said in a note.

China’s yuan falls past key 6.9/dlr threshold

However, the weak growth outlook for China, “and policy divergence between the U.S. and China” could continue to pressure the yuan in the coming months, the bank said.

“The greenback also has additional safe haven demand amid fears of a global growth slowdown and geopolitical tensions.”

The world’s second-biggest economy is grappling with persistent COVID outbreaks, with the virus again spreading to large cities like Shenzhen, and Chengdu, the biggest city in western China.

“Markets could once again be hit in the next couple of weeks, likely triggering another round of cuts by economists on the street,” Nomura’s Chief China Economist Ting Lu wrote.

“The downswing stage of the current COVID business cycle might be worse than markets had expected earlier.”

Sentiment has also been hit by geopolitical tensions.

Politico reported that the Biden administration plans to ask the U.S. Congress to approve an estimated $1.1 billion arms sale to Taiwan, including 60 anti-ship missiles and 100 air-to-air missiles.

Maybank said that yuan remains under pressure in anticipation of potential downside surprises for China’s August manufacturing PMI activity data due this week.