China’s yuan extends losses, set for worst week since 2019

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SHANGHAI — China’s yuan extended losses

against the dollar on Friday and looked set for its worst week

in more than 2-1/2 years, as market participants wondered if the

sizeable fall this week was a policy response to counter

economic slowdown.

A hawkish U.S. Federal Reserve, the vanishing Chinese yield

advantage and rising concerns over domestic economic growth have

dragged the yuan, or renminbi, to seven-month lows.

The yuan’s losses accelerated after a breach of the

psychologically critical 6.4 per dollar, with the onshore yuan

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traded at 6.4692 by midday on Friday, a loss of 1.5%

against the greenback for the week, which is the biggest weekly

drop since August 2019.

“The macro outlook for China and the renminbi have certainly

shifted significantly over the last several weeks on account of

the COVID-driven lockdowns and disruptions in large parts of the

country, especially Shanghai,” said Alvin Tan, Asia FX

strategist at Royal Bank of Canada.

But, some stakeholders were actually “quite happy” with such

yuan weakness, which could alleviate pressure on Chinese

exporters that are suffering from lockdowns, traders said.

“Export growth is likely to slow, so allowing some weakness

in the yuan at this point is fine,” said a trader at a Chinese

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bank.

Multiple traders said they have not yet seen state-owned

Chinese banks, which usually act on behalf of the central bank,

appear in the market to stem the yuan’s losses as they are prone

to during periods of rapid moves, which they felt was a sign of

official approval for some depreciation.

The yuan’s trade-weighted basket index, a gauge

that measures its value against that of its trading partners,

eased to a two-month low of 104.25 on Friday. China is keen to

keep the index in a certain range to make sure the country isn’t

disadvantaged in external trade.

In yuan options trading, the implied volatility and risk

reversals only showed mild yuan depreciation pressure

ahead. Some market participants said China’s ample FX deposits

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acquired by the private sector since the pandemic, coupled with

the People’s Bank of China’s (PBOC) FX policy management via its

daily fixing, could prevent the yuan from sinking too fast and

too far.

On Friday, the PBOC set the midpoint rate at a

six-month low for the yuan at 6.4596 per dollar, but it was 45

pips firmer than Reuters’ estimate of 6.4641.

While a much weaker-than-expected fixing seen on Wednesday

“was a strong policy greenlight for CNY weakness, the fix today

could also be a message to check exuberant USD/CNY bulls,”

analysts at Maybank said in a note.

China’s foreign exchange deposits hovered at a record high

of $1.05 trillion at the end of March.

“Based on the pandemic outbreak in various cities places in

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China and the economic growth challenges, along with a more

hawkish Fed,” UBS Global Wealth Management revised down its

forecast for the yuan to trade at 6.55 per dollar at end-June

from 6.40 previously.

The yuan market at 0400 GMT:

ONSHORE SPOT:

Item Current Previous Change

PBOC midpoint 6.4596 6.4098 -0.77%

Spot yuan 6.4692 6.4521 -0.26%

Divergence from 0.15%

midpoint*

Spot change YTD -1.77%

Spot change since 2005 27.94%

revaluation

Key indexes:

Item Current Previous Change

Thomson 103.7 103.66 0.0

Reuters/HKEX

CNH index

Dollar index 100.611 100.578 0.0

*Divergence of the dollar/yuan exchange rate. Negative number

indicates that spot yuan is trading stronger than the midpoint.

The People’s Bank of China (PBOC) allows the exchange rate to

rise or fall 2 percent from official midpoint rate it sets each

morning.

OFFSHORE CNH MARKET

Instrument Current Difference

from onshore

Offshore spot yuan 6.4907 -0.33%

*

Offshore 6.566 -1.62%

non-deliverable

forwards

**

*Premium for offshore spot over onshore

**Figure reflects difference from PBOC’s official midpoint,

since non-deliverable forwards are settled against the midpoint.

.

(Reporting by Winni Zhou and Andrew Galbraith; Editing by

Christopher Cushing)