HONG KONG: China’s yuan weakened slightly against the dollar on Wednesday, as factory gate prices went backwards and consumer inflation slowed, adding to traders’ concerns about demand and the economic outlook.
The People’s Bank of China set the midpoint rate at 7.2189 per dollar prior to market open, weaker than the previous fix 7.215.
In the onshore market, the yuan opened at 7.2322 per dollar and was changing hands at 7.2464 at midday, 144 pips away from the previous late session close and 0.38% away from the midpoint.
The spot rate is currently allowed to trade within a 2% band above or below the official fixing on any given day.
The global dollar index rose to 109.681 from the previous close of 109.636, as traders awaited results from US mid-term elections and inflation data.
China reported on Wednesday its producer price index fell 1.3% year-on-year in October, its first drop since December 2020, underlining production disruptions amid strict COVID curbs and a weak property sector.
The consumer price index (CPI) climbed 2.1% year-on-year, cooling from a 2.8% rise in September and slower than analysts’ forecast.
“China’s weak activity data, soft non-food price inflation indicates an economy suffering from weak demand,” said Stephen Innes, managing partner at SPI Asset Management.
The soft inflation means authorities may be more comfortable with yuan weakness, albeit at a pace that does not encourage outflows, he said.
A trade-weighted yuan basket index complied by China Foreign Exchange Trade System, the which tracks the onshore yuan against 24 foreign currencies, fell to 98.63, lowest since Sept. 10, 2021.
The offshore yuanwas trading at 7.2463 per dollar, close to the onshore spot rate.
The market has seized on incremental policy adjustments as evidence that China is preparing for an eventual economic reopening.
Such bets had triggered the biggest jump on record in the offshore yuan last week.
China’s yuan dips as fresh COVID outbreaks offset reopening optimism
However, “optimism on the China reopening was waning as the COVID resurgence in reality fueled concern over the escalation in lockdowns, especially in the Guangdong province,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank.
“We pay attention to the possible disinflation trend driven by weakening demand amid the zero-COVID policy and property downturn,” he said.
Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan’s value, traded at 7.0468, 2.44% away from the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate.