The yuan posted its second largest monthly fall on record against the dollar on Tuesday after the central bank softened its midpoint to a 5-year low amid growing expectations of a US interest rate hike as soon as June. The yuan ended May 1.6 percent lower, its biggest monthly drop since it fell 2.7 percent in August 2015 when the central bank devalued the currency.
The People's Bank of China on Tuesday set the midpoint rate at 6.579 per dollar prior to the market open, only 0.01 percent weaker than the previous fix of 6.5784 and within market expectations. Spot yuan opened at 6.5801 per dollar and was changing hands at 6.5851 around 4:30 pm (0830 GMT), 0.05 percent softer than the previous close.
The market officially closes at 4:30 pm, with the PBOC announcing the close at 6.5846, but there is an evening session that will last until 11:30 pm. The yuan's monthly drop in May also exceeded its December decline of 1.5 percent, when the Federal Reserve interest rate hike that month led to a record monthly fall in China's foreign exchange reserves.
By late trade on Tuesday, the yuan was trading 0.07 percent softer in offshore markets than the onshore spot at 6.5899 per dollar. Offshore one-year non-deliverable forwards contracts , considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.7650, 2.75 percent weaker than the midpoint.While global investor fears of another sharp "one-off" devaluation of the yuan appear to have eased, they remain concerned about China's foreign exchange policy. Most analysts expect the currency to continue to drift as long as the dollar remains strong and China's economy slows.
"The bearish pressure facing the yuan right now comes from the strong performance of the dollar, which is within market expectations," said a trader at a Chinese commercial bank in Shanghai. "Traders and their corporate clients believe this bout of yuan depreciation will not last. Overall, the sentiment is stable." Economists at ANZ believe the yuan will end the year at 6.65 to the dollar. "Post a likely June/July Fed rate hike, if the market thinks the next hike may not come so soon, there could be an interim retracement, but the medium term outlook for the RMB remains," they said in a research note last week.