SHANGHAI: China’s yuan weakened to a three-week low against the dollar on Wednesday, on growing monetary easing expectations in the world’s second-largest economy and as the U.S. currency benefited from a downturn in risk appetite.
Bets that China would cut interest rates increased further after the nation’s central bank made the first monthly increase since November 2022 in loans to policy banks through pledged supplementary lending (PSL) facility.
“The year of 2024 could start with front-loaded policy efforts as Beijing likely aims to keep the growth target ‘around 5%,’” Citi analysts said in a note.
“We see a policy rate/loan prime rate (LPR) cut as early as in coming weeks, within this month.”
They expect a total of 20 basis points in rate cuts and 50 basis points of reductions to banks’ reserve requirement ratio in 2024.
China’s yuan down on first trading day of 2024, policy easing eyed
China is set to roll over 779 billion yuan ($108.97 billion) worth of medium-term policy loans due this month on Jan. 15, followed by monthly LPR fixings on Jan. 22.
Prior to the market’s opening, the People’s Bank of China (PBOC) set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1002 per dollar, 232 pips weaker than the previous fix of 7.0770.
The central bank continued its months-long trend of setting the official guidance rate at levels firmer than market projections, traders and analysts said, a move widely seen as an attempt to prevent the yuan from sliding too fast.
The yuan weakened 2.8% against the dollar in 2023, although it has stabilised somewhat since November.
The gap between the official midpoint and market projections widened on Wednesday, traders said. The fixing was 510 pips stronger than Reuters estimate of 7.1512, compared with 201 pips a day earlier.
In the spot market, the onshore yuan opened at 7.1450 per dollar and weakened to a low of 7.1539 at one point, the softest level since Dec. 13. By midday, it was changing hands at 7.1483, 54 pips weaker than the previous late session close.
On top of the rising expectations of imminent policy easing by Chinese authorities, pressure on the yuan has also been exerted by a rebounding dollar, traders said.
In global markets, the dollar rose broadly and stood near a two-week high against its major peers, underpinned by a confluence of factors including elevated U.S. Treasury yields and a cautious turn in risk sentiment that weighed on Wall Street.
By midday, the global dollar index stood at 102.183, while the offshore yuan was trading at 7.1515 per dollar.
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