SHANGHAI: The yuan strengthened to one-week high on Thursday against the U.S. dollar, even after China’s central bank surprisingly lowered a lending rate, as the greenback eased due to an unwinding of short-yen carry trades.
The spot yuan opened at 7.2550 per dollar and was last trading 35 pips firmer than the previous late session close and 1.8% weaker than the midpoint.
The yuan is up 0.1% against the dollar this month, and 2.2% weaker this year. It has been under pressure since early 2023 as domestic woes around a moribund property sector, anaemic consumption and falling yields drive capital flows out of yuan, and foreign investors stay away from China’s struggling stock market.
The dollar fell to its lowest in more than two months against the yen on Wednesday, as short-yen carry trades were unwound ahead of next week’s Bank of Japan meeting, with investors girding for monetary officials to tighten policy.
Maybank analysts said a weakening dollar from the unwinding carry trades would support the yuan.
“USDCNH (dollar-offshore yuan pair) could continue to remain rather sensitive to the USDJPY (dollar-yen pair). As the carry trade unwinds on the yen front, so would there be some spillover effects on the yuan,” they said in a note.
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The Chinese currency firmed even as the country’s central bank surprised markets for a second time this week by conducting an unscheduled lending operation on Thursday at steeply lower rates, suggesting authorities are trying to provide heavier monetary stimulus to prop up the economy.
“The impact on the yuan will depend on whether yield differentials with the U.S. or the expectation of growth and stimulus will take the driving seat,” said Gary Ng, senior economist for Asia-Pacific at Natixis. “The yuan may still be under pressure if investors continue to expect lower interest rates in China.”
Globally, traders are watching out for a U.S. inflation reading on Friday and a Federal Reserve meeting next week.
Markets are fully pricing in a quarter-point rate cut from the Fed in September, with even some risk of a 50 basis point cut. For all of 2024, a total easing of 65 basis points has been priced in.
Prior to the market opening, the People’s Bank of China set the midpoint rate, around which the yuan is allowed to trade in a 2% band at 7.1321 per dollar, 1,385 pips firmer than a Reuters estimate.
The central bank has been gradually lowering its daily yuan official guidance - albeit well within market projections – with a bias suggesting it is allowing some depreciation, traders and analysts said.
Based on Thursday’s official guidance, the yuan is allowed to drop as far as 7.2747.
The offshore yuan traded at 7.262 yuan per dollar, up about 0.05% in Asian trade.
The dollar index tracking the greenback against six major currencies was 0.172% lower at 104.2.