SHANGHAI: China’s yuan inched lower against the dollar and continued hovering near a key threshold on Monday as a much strengthened official guidance stabilized the impact from widening yield differentials between the world’s two largest economies.
Yields on China’s long-dated government bonds, including 10-year and ultra-long 30-year and 50-year, all hit their lowest levels on record at one point in morning deals, widening yield disadvantage against the United States, which pressured the yuan, traders and analysts said.
The yield gap between China and the United States widened to its largest in 22 years last week. And the divergent yield moves prompted money to chase dollar-donominated assets for higher returns.
As of 0230 GMT, the onshore yuan was 0.02% lower at 7.2955 to the dollar, and not far from the psychologically important 7.3 per dollar and a 13-month low of 7.2999 hit last week.
Its offshore counterpart traded at 7.3016 yuan per dollar.
“The widening yield differential between the US and China has continued to exert pressure on the yuan,” said Tommy Xie, head of Greater China research at OCBC Bank.
“However, the currency’s movement remains well-contained, supported by a stable fixing around 7.19 since mid-November.”
China’s yuan heads for weekly fall
The People’s Bank of China (PBOC) has been setting its official midpoint fixings on the firmer side of the key 7.2 per dollar level and stronger than market projections since mid-November, which traders and analysts widely interpret as a sign of rising unease over recent yuan declines.
Prior to market opening on Monday, the PBOC set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1870 per dollar, its strongest since Dec. 12 and 1,010 pips firmer than a Reuters’ estimate of 7.2880.
“This defensive line at USD/CNY (of) 7.20 is helping to buffer broad USD strength among Asian currencies, but at some point next year, likely in first half of 2025, the 7.20 level will go when another US-China trade war commences,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.
Traders also noted that given overseas markets are entering the holiday season, trading is expected to lighten in run-up to the year-end.
In global markets, the dollar was steady after US inflation data showed only a modest rise last month, easing some concerns about the pace of US rate cuts next year.