China’s yuan weakens as Fed minutes lift dollar

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SHANGHAI — China’s yuan weakened on

Thursday after minutes from the March meeting of the U.S.

Federal Reserve indicated widespread support for large rate

hikes, boosting the greenback.

The meeting minutes helped to lift the U.S. dollar index

to its highest since May 2020 overnight, at 99.778. It

was last at 99.572.

Before the market open, the People’s Bank of China set the

yuan’s midpoint rate slightly stronger than expected,

at 6.3659 per dollar, its firmest since April 1.

Spot yuan opened at 6.3592 per dollar and firmed

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slightly in early trade before turning weaker.

Traders said foreign exchange sales by corporates provided

some support, but overall turnover remained low amid a continued

lockdown in Shanghai, China’s financial center.

Shanghai on Thursday said it was trying its best to improve

the distribution of food and essential goods to locked-in

residents as discontent grew with COVID-19 curbs entering an

11th day.

By midday, the yuan was changing hands at 6.3621 per dollar,

33 pips weaker than Wednesday’s late session close. The offshore

yuan also weakened, to 6.3675 per dollar from a close

of 6.3595.

A trader at a Chinese bank said spot yuan remained very

steady, though swaps were expectd to come under pressure under

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the influence of narrowing China-U.S. spreads.

On Thursday, the spread between the benchmark Chinese and

U.S. 10-year government bond yields stood at 20

basis points, having narrowed to as little as 8 basis points a

day earlier.

In a commentary in the official Shanghai Securities News on

Thursday, a former foreign exchange regulator said that the

yield spread between U.S. and Chinese bonds was likely to narrow

even further, or could even invert.

“The divergence in U.S. and Chinese monetary policy will

further tighten the China-U.S. spread, slowing foreign capital

inflows and even leading to capital outflows,” said Guan Tao,

global chief economist at BOC International and a former

official at the State Administration of Foreign Exchange (SAFE).

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“But net capital outflow does not necessarily lead to yuan

depreciation … If Fed tightening exacerbates geopolitical

risks, although this may increase the capital flow shock that

China encounters, foreign exchange assets accumulated by the

private sector can play a ‘reservoir’ function to better

regulate the balance of payments,” Guan wrote.

The yuan market at 4:23AM GMT:

ONSHORE SPOT:

Item Current Previous Change

PBOC midpoint 6.3659 6.3799 0.22%

Spot yuan 6.3621 6.3588 -0.05%

Divergence from midpoint* -0.06%

Spot change YTD -0.11%

Spot change since 2005 revaluation 30.09%

Key indexes:

Item Current Previous Change

Thomson Reuters/HKEX CNH index 104.64 104.61 0.0

Dollar index 99.572 99.599 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 * 6.3675 -0.08%

Offshore non-deliverable 6.4407 -1.16%

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 and Jindong Zhang)