SHANGHAI: China’s yuan slipped against the dollar on Friday and looked set for the seventh straight weekly drop, the longest such losing streak since 2021, reflecting market worries of fewer Federal Reserve rate cuts and more U.S. tariffs on Chinese goods.
During Donald Trump’s first presidency, the yuan weakened about 5% against the dollar in the initial round of U.S. tariffs on Chinese goods in 2018, and fell another 1.5% a year later when trade tensions escalated.
As part of his pitch to boost American manufacturing during the recent election campaign, Trump said he will impose tariffs of 60% or more on goods from China. The proposed tariffs, as well as other policies such as tax cuts, are seen as inflationary and likely to keep U.S. interest rates relatively high in a blow to currencies of trading partners.
But, losses in the yuan on Friday were limited as the central bank again set its daily yuan midpoint at levels much stronger than markets had projected, with traders and analysts interpreting it as a sign of official support to prevent the local currency from falling too fast.
Prior to the market 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 7.1992 per dollar, 490 pips firmer than a Reuters’ estimate of 7.2482.
“The PBOC’s downside bias on the daily USD/CNY fix is back,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.
China’s yuan falls to 3-month low
“The USD/CNY reference rate was set with 7.34 as the upper bound of the exchange rate band, indicating that the USD/CNY 7.30-7.35 zone remains a sensitive one for the PBOC.”
Market participants widely considered the official guidance as a tool to manage expectations and the central bank had set firmer-than-expected fixings late last year and early this year in an attempt to keep the currency stable.
By 0304 GMT, the onshore yuan was 0.06% lower at 7.2325 to the dollar. If it finishes the late night session at the midday level, it would have lost 0.6% to the dollar, extending its weekly losing streak to the longest since March 2021.
“The market is likely to be closely watching the Trump administration’s choice of cabinet members and watching for any signal related to when and how tariffs will be implemented,” said Ju Wang, head of Greater China FX & rates strategy at BNP Paribas.
“The market is shifting towards a long position on the USD, although it hasn’t yet reached the same level of crowding seen in June and July. We do expect the trend to continue, which would result in further pressure globally of a stronger USD.”
Currency traders said losses in the offshore yuan were also trimmed, as yuan borrowing costs rose in Hong Kong with the CNH Hong Kong Interbank Offered Rate benchmark (CNH HIBOR) rising across tenors.
The dollar/offshore yuan’s tomorrow-next swap points, a gauge that measures yuan’s funding costs via currency forwards, kept climbing this week.
Tighter yuan conditions and higher funding rates effectively discouraged investors from shorting the yuan.
The offshore yuan traded at 7.241 yuan per dollar around midday.
Separately, data on Friday showed that China’s factory output growth slowed in October and demand woes in the property sector showed few signs of abating, even though consumers seemed to perk up a bit more, backing calls for more stimulus to get the economy firing on all cylinders.
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