China’s yuan weakens to 6-mth low; steady lending benchmark limits losses

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SHANGHAI — China’s yuan fell to a

six-month low against the dollar on Wednesday, dragged down by a

weaker-than-expected official midpoint fixing and persistent

worries over economic growth outlook.

But falls were limited by China surprisingly keeping its

benchmark lending rates steady for the third straight month at

its April fixing. Markets saw the move as indicating caution by

Beijing in rolling out easing measures.

Prior to market opening, the People’s Bank of China (PBOC)

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set the midpoint rate at 6.3996 per dollar, 276 pips

or 0.43% weaker than the previous fix of 6.3720.

But Wednesday’s official guidance rate, the weakest since

Nov. 12, 2021, came in 143 pips softer than a Reuters estimate

of 6.3853.

Markets usually note the PBOC’s daily yuan fixing to gauge

the official attitude towards foreign exchange policy. Many

currency traders interpreted Wednesday’s weaker-than-expected

midpoint as indicating it would allow some weakness in the yuan.

The spot yuan opened at 6.4055 per dollar and

fell to a low of 6.4115 at one point, the softest level since

Oct. 29, 2021. By midday, it was changing hands at 6.3970, 30

pips weaker than the previous late session close.

Its offshore counterpart also followed the

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weakening trending to touch a six-month low of 6.4394 before

trading at 6.4161 around midday.

Traders said an economic slowdown due to COVID-19 induced

lockdowns and rising U.S. yields have piled downside pressure on

the Chinese currency.

The yield gap between China’s benchmark 10-year government

bonds and their U.S. counterparts stood

at -8 basis points (bps), the lowest since 2010, down about 50

bps from the beginning of the month.

Negative yield differentials have allowed dollar strength to

“belatedly transmit into the RMB space,” said Terence Wu, FX

strategist at OCBC Bank.

China’s vanishing yield advantage and policy divergence with

the United States, which is set to raise interest rates

aggressively this year, have piled pressure on the yuan and

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forced the PBOC to ease more cautiously.

“With commodity prices elevated and the USD/CNY just

breaching the critical 6.4, the PBOC appears to be concerned

about inflation risks and Fed hikes,” Citi analysts said in a

note.

“Looking ahead, the monetary policy may take the backseat,

and the PBOC will likely exercise restraint in interest rate and

reserve requirement ratio (RRR) decisions, but rely more on

credit policy to support growth.”

The American investment bank expects a 10 bps interest rate

reduction and a 25 bps cut to the RRR this year.

However, some market participants said the yuan was yet to

come under strong depreciation pressure, because many currency

traders in Shanghai were working remotely, leaving recent

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trading volume at only about 60% of

pre-lockdown levels.

“So, depreciation expectations are also discounted,” said a

trader at a foreign bank.

By midday, the global dollar index fell to 100.687

from the previous close of 100.961.

The yuan market at 0401 GMT:

ONSHORE SPOT:

Item Current Previous Change

PBOC midpoint 6.3996 6.372 -0.43%

Spot yuan 6.397 6.394 -0.05%

Divergence from -0.04%

midpoint*

Spot change YTD -0.66%

Spot change since 2005 29.38%

revaluation

Key indexes:

Item Current Previous Change

Thomson 104.83 105.26 -0.4

Reuters/HKEX

CNH index

Dollar index 100.687 100.961 -0.3

*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 6.4161 -0.30%

*

Offshore 6.4945 -1.46%

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)