BEIJING/SHANGHAI: China’s yuan briefly hit a five-month low against the dollar before recouping some of the losses on Tuesday, as upbeat first-quarter economic data and state bank support offset a weakened official midpoint fixing.
The volatile ride of the yuan in morning deals comes as the central bank set the guidance on the weaker side of the key 7.1 per dollar for the first time in over three weeks, with market participants interpreting it as a sign of loosening grip on the currency.
Markets have been closely monitoring the daily yuan fixing in recent months for possible changes in foreign exchange policy and official stance.
“The daily USD/CNY fixing finally rose above 7.1. This has happened when USD/JPY is testing the critical 155 level, a ceiling that has been held since 1990s,” said Ju Wang, head of Greater China FX & rates strategy at BNP Paribas.
“Meanwhile, other Asian currencies are falling fast, testing 2022 and 2023 summers’ highs. The RMB CFETS basket has climbed above 100, adding significant amount of pressure on the People’s Bank of China (PBOC) to follow the market.”
Prior to market opening, the PBOC set the midpoint rate , around which the yuan is allowed to trade in a 2% band, at a five-month low of 7.1028 per dollar, weaker than the previous fix of 7.0979.
The central bank has been keeping the official midpoint in a tight range of 7.09 to 7.1 per dollar over the past two months and they were consistently firmer than market projections, traders said.
“Currency depreciation is one of the channels through which looser monetary policy works to support the economy, so the appreciating renminbi is counteracting the PBOC’s easy policy stance,” said Alvin Tan, Asia FX strategist at RBC Capital Markets.
“The intense concern with the bilateral USD/CNY exchange rate may even be preventing the PBOC from cutting interest rates further. This contradiction between narrow currency policy and broader monetary policy cannot last so long as the US dollar’s broad-based advance continues.”
The sudden breach of the key 7.1 in the midpoint dragged down the spot market.
The onshore yuan weakened to a new five-month low of 7.2422 per dollar, before paring some of the losses to trade at 7.2374 by midday, compared with the previous close of 7.2378.
Sources told Reuters that China’s major state-owned banks were seen selling dollars in onshore markets in early trade on Tuesday, in an apparent bid to stabilise the falling currency.
Separately, official data showed that China’s economy grew faster-than-expected in the first quarter, offering some relief to officials as they try to shore up growth in the face of protracted weakness in the property sector and mounting local government debt.
Comments
Comments are closed.