SHANGHAI: China’s yuan weakened against the US dollar on Monday, in tandem with a softer Japanese yen, but is expected to remain in a narrow range for the next few sessions as markets await US inflation data for more clues on when the Federal Reserve may start cutting rates.
The spot yuan opened at 7.1720 per dollar and was last trading 119 pips lower than the previous late session close and 0.49% weaker than the midpoint.
The yen was a tad softer against the dollar in trading thinned by a Japanese holiday on Monday.
The yuan is up 0.5% against the dollar this month, in line with a surging yen, as an unwinding of short positions snowballed following a surprise rate hike by the Bank of Japan and weakness in US economic indicators.
However, the Chinese currency is still 1.1% weaker for the year-to-date.
It has been under pressure since early 2023 as a prolonged property crisis, anaemic consumption and falling yields drive capital flows out of yuan, and foreign investors stay away from its struggling stock market.
All eyes are on US producer and consumer price numbers due on Tuesday and Wednesday, respectively, this week, as well as the global central bankers’ meeting at Jackson Hole, Wyoming, next week.
China will also release a flurry of data this week which is expected to show the economy got off to a weak start to the second half of the year.
“US data this month is key. There was a relatively high expectation for rate cut previously. If it changes, the volatility will go up,” said a trader at a foreign bank.
China’s yuan ticks up after CPI rise
“There are two-way risks for the yuan at this point from China’s own July data given low expectations already, US data that could unwind the aggressive dovish bets on the Fed (we saw that on ISM services) and potentially from Powell at Jackson Hole,” said analysts at Maybank.
“The range where the yuan could trade could be wide within 7.14-7.20.”
The yuan weakened even as the US-China yield gap narrowed.
The People’s Bank of China (PBOC) said last Friday it will gradually increase buying and selling of treasury bonds in its open market operations, The PBOC also vowed it will prevent the formation and self-reinforcement of unilateral expectations and will guard against the risk of the exchange rate overshooting.
Goldman Sachs analysts said the strengthening of the yuan is increasingly disconnected with underlying economic fundamentals, adding they recommend going short the yuan against the CFETS basket.
“Domestic demand and consumer confidence is weak, property prices continue to fall and have not shown signs of stabilisation, and the PBoC has continued to ease policy with unanticipated cuts in policy rates in late July.”
Prior to the market opening, the People’s Bank of China set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1458 per dollar, 319 pips firmer than a Reuters’ estimate.
The offshore yuan traded at 7.1822 yuan per dollar, down about 0.08% in Asian trade.
The dollar’s six-currency index was 0.019% lower at 103.2.
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