SHANGHAI: China’s yuan slipped to a one-week low against the dollar on Friday and looked set for a losing week, reflecting a rebound in greenback in overseas markets, while the central bank continued to pare back support through its official daily fixing.
Federal Reserve Chair Jerome Powell’s comments signalling no rush to cut interest rates in the United States supported the greenback and pressured emerging market currencies.
Fears of a possible escalation in trade disputes between the world’s two largest economies in coming weeks also remained a drag on the yuan sentiment, traders said.
Meanwhile, the central bank appeared to dial back its support for the Chinese currency via its daily midpoint fixings, with a months-long gap between the official guidance and market projections narrowing.
Market participants interpreted that as a sign policymakers are looking to prevent any fast yuan appreciation in a benign dollar environment.
Prior to the market opening on Friday, the People’s Bank of China (PBOC) set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1760 per dollar, its weakest since January 20 and 663 pips firmer than a Reuters’ estimate of 7.2423.
Analysts and traders usually use the gap between official fixing and market projections to gauge the official foreign exchange stance.
The gap soared to a much as 1,557 pips in mid-January and has been wider than 1,000 pips for most of the year to date.
A wider gap suggested stronger support to keep the yuan steady.
The onshore yuan eased to a low of 7.2524 per dollar in morning deals, the weakest level since March 14, before changing hands at 7.2484 at 0300 GMT, while its offshore counterpart traded at 7.2530.
Developments in trade relations with the United States continue to remain front and centre on investors’ radar.
President Donald Trump still intends to impose new reciprocal tariffs on a number of US trading partners on April 2, the White House said this week.
“It is likely that more tariffs or other actions could be announced after the US administration finishes its various reviews on China’s trade,” analysts at HSBC said in a note.
“Tariff-induced depreciation pressure on the RMB is, therefore, still very high. Even though we believe the Chinese authorities have their own motivations for keeping USD/RMB reasonably stable, some moderate adjustment may still be warranted later to alleviate the impact on exporters.”
They retained their view that the yuan will trade at 7.4 per dollar at the end of this year.
“The yuan exchange rate could be faced with near-term depreciation pressure with additional tariffs effective,” Citi analysts said in a note.
“A (political) deal, if it rolls back additional tariffs, could by nature lead to yuan appreciation, We also expect FX discussions to be included in the potential deal, implicitly or explicitly.”
Citi expects the yuan to hit 7.4 in three months before pulling back to 7.3 in six to 12 months.
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