HONG KONG: China’s yuan weakened against the dollar on Wednesday after patchy economic data suggested local rate cuts may be needed but the currency held tight ranges as investors awaited US inflation data that could influence Federal Reserve policy.
While China’s first quarter new bank lending hit an all-time high, driven by household loans, consumer inflation weakened to an 18-month low in March, data showed on Tuesday, bolstering the view that China’s central bank would need to cut interest rates to support soft demand.
“The low inflation would give China’s central bank more room to cut rates, and that would keep the yield differential between China and the US wide,” said Khoon Goh, head of Asia research at ANZ.
“There is no real impetus for strong inflows into the Chinese currency at this stage,” said Goh. Higher yields for dollar-denominated assets have led to outflows from yuan-dominated assets and weighed on the yuan.
The spot yuan opened at 6.8900 per dollar and was changing hands at 6.8885 at midday, 30 pips weaker than the previous late session close and 0.05% away from the midpoint.
The People’s Bank of China set the midpoint rate at 6.8854 per US dollar prior to market open, firmer than the previous fix of 6.8882.
The spot rate is currently allowed to trade with a range 2% above or below the official fixing on any given day.
China will next week release the monthly fixing of its benchmark loan prime rate (LPR).
More immediately, investors await the release of US consumer prices data due later on Wednesday and producer prices on Thursday.
China’s yuan eases, market awaits China data as next catalyst
The inflation data is expected to show the core consumer price index rose 5.6% year-over-year in March, according to a Reuters poll of economists.
Stronger than expected inflation data might prompt the US central bank to delay its decision to pause interest rate hikes, adding to investor concerns that it would keep interest rates higher for longer.
The Fed, which is due to meet on May 2-3 to deliberate policy rates, is expected to need one more hike to wring high inflation out of the economy.
The global dollar index fell to 102.133 from the previous close of 102.204.
The offshore yuan was trading at 6.8933 per dollar, marginally below the onshore spot rate.
The one-year forward value for the offshore yuan traded at 6.7263 per dollar, indicating a roughly 2.48% appreciation over the next 12 months.
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