SHANGHAI: China’s yuan inched lower against the dollar on Tuesday, pressured by market expectations of further widening of yield differential in favour of the United States, amid growing bets of monetary easing in the world’s second-largest economy.
State-owned newspapers said on Tuesday China can lower banks’ reserve requirement ratios (RRR) before the year-end to replenish financial system liquidity.
The RRR cut should reduce lenders’ financing costs and support an economic recovery, although it would inevitably widen the yield gap between China and other major economies and pile downward pressure on the yuan, traders said.
“Such a move (to cut RRR) would align with efforts to alleviate pressures on banks, particularly concerning their shrinking net interest margins,” said Tommy Xie, head of Greater China research at OCBC Bank.
“Market participants will be keenly observing the developments this week, anticipating whether China will announce a new round of RRR reduction.”
In the spot market, the onshore yuan opened at 7.2861 per dollar and was changing hands at 7.2931 at midday, 46 pips weaker than the previous late session close.
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Prior to 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 7.1768 per dollar, 1 pip firmer than the previous fix of 7.1769.
The official midpoint fixing continued to come in stronger than market projections, traders and analysts said, interpreting it as an official attempt to rein in excessive yuan weakness.
Tuesday’s guidance rate was 1,117 pips stronger than Reuters estimate of 7.2885.
Market participants now shifts their attention to the PBOC’s loan operations on Wednesday, when it is poised to offer 850 billion yuan worth of medium-term lending facility (MLF) loans.
Markets will closely gauge the amount of liquidity offered and the borrowing costs set to glean clues on authorities’ official stance.
“With deflation risks rising, we do not think stimulus measures taken so far will have much lasting impact and we so look for more in the coming months,” said Win Thin, global head of currency strategy at Brown Brothers Harriman, expecting the PBOC to keep the one-year MLF rate unchanged at 2.5%.
By midday, the global dollar index rose to 105.693 from the previous close of 105.631, while the offshore yuan was trading at 7.301 per dollar.