China’s Yuan Weakens to A 6 Month Low
The Chinese yuan sank to a six-month low versus the US dollar on Wednesday, pulled down by a weaker-than-expected official midpoint fixing and continued concerns over the outlook for economic growth.
Markets interpreted the action as Beijing exercising caution in implementing easing measures.
The People’s Bank of China (PBOC) fixed the midpoint rate (CNY=PBOC) before market opening at 6.3996 per dollar; 276 pips or 0.43 percent lower than the previous fix of 6.3720.
However, Wednesday’s official guidance rate, the lowest since Nov. 12, 2021, was 143 basis points lower than a Reuters estimate of 6.3853.
Many currency traders read Wednesday’s weaker-than-expected midpoint as hinting that the yuan will be allowed to weaken.
The spot yuan (CNY=CFXS) began at 6.4055 per dollar; it dropped to 6.4115 at one point, its lowest level since Oct. 29, 2021. It was trading at 6.3970 around lunchtime, 30 pips more melancholy than the previous late session close. Its offshore equivalent (CNH=D3) also weakened, reaching a six-month low of 6.4394 before trading at 6.4161 about lunchtime.
Traders stated that the Chinese currency has been under pressure due to an economic slowdown caused by COVID-19-induced lockdowns and rising US yields.
The yield spread between China’s benchmark 10-year government bonds (CN10YT=RR) and their US counterparts (US10YT=RR) was -8 basis points (bps), the smallest since 2010, and was down roughly 50 bps from the start of the month. This year, the American investment bank anticipates a ten basis point fall in interest rates and a 25 basis point reduction in the RRR.
However, some market players believe that the yuan has yet to face significant devaluation pressure because many currency dealers in Shanghai were working remotely; this left recent trading volume (CNYSPTVOL=CFXT) at just roughly 60% of pre-lockdown levels.