SHANGHAI: China’s yuan eased against the greenback on Monday and traded on the weaker side of the psychologically critical 7 per dollar level, pressured by Federal Reserve’s widely anticipated interest rate hike late this week.

Prior to market opening, the People’s Bank of China (PBOC) set the midpoint rate at 6.9396 per dollar, 91 pips or 0.13% weaker than the previous fix of 6.9305 on Friday.

However, the official guidance came in firmer than market projections, traders and analysts said, continuing a trend in place since late August in what market participants interpret as a bid to slow the yuan’s slide.

“The strong fixing bias could also be an attempt to offset the pressure from the net open market operation (OMO) injection on the yuan,” analysts at Maybank said in a note.

China’s yuan slips but supported by firm fixings, pause in easing

The PBOC injected a net 12 billion yuan ($1.71 billion) through short-term liquidity tools on Monday to counteract quarter-end higher cash demand, while also lowering the borrowing cost of 14-day reverse repos.

Higher cash injections and lower interest rates should naturally pressure the currency, analysts said.

In the spot market, the onshore yuan opened at 6.9900 per dollar and was changing hands at 7.0080 at midday, 375 pips weaker than the previous late session close.

Its offshore counterpart traded at 7.0128 per dollar around midday.

Currency traders said the yuan remained under pressure ahead of a slew of global central bank meetings this week, where the Fed and the Bank of England are expected to further hike rates.

China, along with Japan, has been a major outlier in a global run of interest rate hikes to tame inflation with Beijing focused on reviving the economy hurt by COVID-19 shocks.

But such widening policy divergence weighed on the yuan.

“Different from the past few rounds of RMB depreciation, the collapse of RMB forward points makes RMB short easy to hold due to positive carry,” analysts said OCBC Bank said in a note.

“This will make China’s counter-cyclical measures less effective to stop RMB depreciation as what they did before.”

One-year dollar/yuan swap points traded in the forward market hovered at a 12-year low of -1,395 points on Monday.

Instead, state media have geared up warning the market of strong one-way bets against the local currency, with traders and analysts viewing them as part of official attempts to rein in excess yuan weakness.

Wang Chunying, spokesperson of the State Administration of Foreign Exchange (SAFE), was quoted by the state broadcaster CCTV on Friday urging companies not to speculate on the currency.

And the CCTV also quoted unnamed sources close to the central bank as saying that the yuan will maintain basically stable.