China’s yuan slips to late 2020 lows as dollar surges, economy wobbles

Article content

SHANGHAI — China’s yuan slipped to

nearly 17-month lows against the U.S. dollar on Thursday as

widening COVID-19 lockdowns put more pressure on the slowing

economy, and as the greenback continued to surge.

The Bank of Japan on Tuesday added fuel to the fire,

propelling the dollar higher as it said it would keep interest

rates ultra-low and maintain massive stimulus. The dollar-yen

pair rose to a 20-year high and the dollar index jumped

following the announcement.

The yuan’s slump followed two days of relative stability

Article content

after the People’s Bank of China (PBOC) on Monday cut banks’

foreign exchange reserve requirements in a move to put a floor

under recent steep falls.

It also comes as officials in Beijing embarked on more

COVID-19 mass testing aimed at averting a Shanghai-like lockdown

that has hobbled economic activity in the country’s financial

hub.

With few other signals that the PBOC is uncomfortable with a

softer yuan, market participants remain uncertain whether the

bank has a clear “red line” for depreciation.

On Thursday, the PBOC once again set the yuan’s daily

midpoint fixing close to market forecasts, at 6.5628

per dollar. That was its weakest since April 2, 2021.

Onshore spot yuan opened at 6.5622 per dollar and

weakened as far as 6.5919, its softest level since Nov. 30,

Article content

2020.

By around midday it had recovered some ground to change

hands at 6.5895 per dollar, 280 pips or 0.4% weaker than

Wednesday’s late session close.

The yuan has fallen nearly 4% against the dollar this month,

putting it on track for what could be its biggest monthly drop

since China unified official and market exchange rates in 1994.

The offshore yuan weakened to 6.6371 per dollar,

its weakest since Nov. 9, 2020. By midday it was trading at

6.6336 per dollar, from a close of 6.5887 on Wednesday.

Ken Cheung, chief Asian FX strategist at Mizuho said that a

wide gap between the onshore and offshore yuan indicated more

bearish sentiment offshore, adding that thin market liquidity

due to the Shanghai lockdown could exacerbate any spillover in

Article content

negative sentiment into the onshore market.

“If the situation continued, the PBoC would be tempted to

take action to anchor the CNH market,” he said.

Ahead of a steep Federal Reserve rate hike expected next

month and as a poor outlook for the yen and euro keep the dollar

aloft, traders said the yuan has more room to fall in the near

term.

Offshore one-year non-deliverable forwards contracts

(NDFs), considered the best available proxy for

forward-looking market expectations of the yuan’s value, traded

at 6.7162.

“The euro and yen are too weak. The dollar index has to rise

more,” said a trader at a foreign bank.

The global dollar index rose to 103.438 from the

previous close of 102.954.

In the face of increasing economic pressures, traders and

Article content

analysts continue to await a meeting this week of the Politburo,

China’s highest decision-making body, for more signs of economic

support.

The State Council has vowed to tackle bottlenecks in supply

chains affected by COVID, state media reported on Wednesday.

The yuan market at 4:29AM GMT:

ONSHORE SPOT:

Item Current Previous Change

PBOC midpoint 6.5628 6.5598 -0.05%

Spot yuan 6.5895 6.5615 -0.42%

Divergence from 0.41%

midpoint*

Spot change YTD -3.56%

Spot change since 2005 25.60%

revaluation

Key indexes:

Item Current Previous Change

Thomson 102.89 103.06 -0.2

Reuters/HKEX

CNH index

Dollar index 103.438 102.954 0.5

*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 6.6336 -0.66%

*

Offshore 6.7162 -2.28%

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 Andrew Galbraith in Shanghai and Xiao Han in

Beijing; Editing by Kim Coghill)