SHANGHAI: The yuan held steady on Tuesday against the US dollar, with analysts saying the fragile currency would stand up to the central bank’s cut in key interest rates, as traders await US data this week to gauge the Federal Reserve’s policy path.
China surprised markets on Monday by lowering a string of major short and long-term interest rates, in an effort to boost growth in the world’s second-largest economy.
Analysts said the cuts would not hurt the yuan as the central bank could use tools such as official guidance to avoid disorderly depreciation.
Spot yuan opened at 7.2722 per dollar and was last trading 2 pips lower than the previous late session close at 7.2738 by 0259 GMT, down 1.97% from the midpoint.
The yuan is down 2.4% this year, pressured since early 2023 by domestic woes as a moribund property sector, anaemic consumption and falling yields drive out capital, while foreign investors avoid the struggling stock market.
Prior to the opening, the People’s Bank of China (PBOC) set the midpoint rate, around which the yuan is allowed to trade in a band of 2%, at 7.1334 a dollar, or 1,412 pips firmer than a Reuters’ estimate.
The PBOC is likely to look to short-circuit any sharp or disorderly depreciation in the offshore yuan against the dollar by lowering daily fixes and tightening offshore funding, Citi traders said.
“We think rallies in the US dollar against the offshore yuan spot should not be chased, but dips towards support at 7.2850/7.2640 should be bought,” they said in a note to investors.
Market participants are also waiting for clues from US economic data due later in the week and key monetary policy meetings next week of the Federal Reserve and Bank of Japan.
The futures market is betting that this Friday’s US PCE deflators will provide the Fed the confidence to deliver two to three rate cuts in September-December, said Philip Wee, senior FX strategist at DBS.
“We believe USD/CNY will fall to 7.21 by the end of this year on the two Fed cuts we expect later this year,” Wee said.
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