Yuan slips to 17-month low as pressures mount on economy
Currency has lost nearly 4 per cent this month, putting it on track for biggest drop since 1994
The renminbi slipped to near 17-month lows against the US dollar yesterday as widening virus lockdowns added pressure on a slowing economy and the US currency 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 at an ultra-low level and maintain massive stimulus.
The dollar-yen pair rose to a 20-year high and the dollar index jumped after the announcement.
The yuan’s slump followed two days of relative stability after the People’s Bank of China (PBOC) on Monday cut banks’ foreign reserve requirements in a move to put a floor under recent steep falls.
It also comes as officials in Beijing embarked on more 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.
Yesterday, 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.
The onshore spot yuan closed at 6.6115 per dollar, its softest level since November 13, 2020.
The yuan has fallen by nearly 4 per cent 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 eased to 6.6371 per dollar, its weakest since November 9, 2020. By midday, it was trading at 6.6336 per dollar, compared with the close of 6.5887 on Wednesday.
Ken Cheung, chief Asian currency strategist at Mizuho, said a wide gap between the onshore and offshore yuan indicated more bearish sentiment offshore, adding thin liquidity due to the Shanghai lockdown could exacerbate any spillover in negative sentiment into the onshore market.
“If the situation continued, the PBOC would be tempted to take action to anchor the [offshore] market,” he said.
Ahead of a steep US Federal Reserve rate rise expected next month and as a poor outlook for the yen and the euro keeps the dollar aloft, traders said the yuan had more room to fall in the near term.
Offshore one-year nondeliverable forward contracts, considered the best available proxy for forward-looking market expectations of the yuan’s value, traded at 6.7162.
“The euro and the yen are too weak. The dollar index has to rise more,” a foreign bank trader said.
The global dollar index rose to 103.438 from the previous close of 102.954.
In the face of increasing economic pressure, traders and analysts continue to await a meeting this week of the Politburo, China’s highest decision-making body, for more signs of support. The State Council had vowed to tackle bottlenecks in supply chains affected by the coronavirus, state media reported on Wednesday.
Meanwhile, seven banks have slashed their yuan forecasts with the currency headed for its biggest monthly decline since China unified its exchange market in 1994.
“I don’t think this is an end to recent yuan depreciation,” said Bo Zhuang, a senior sovereign analyst at Loomis Sayles Investments Asia in Singapore, who raised concerns of a possible hard landing should a lockdown grip Beijing.
He forecast the yuan would weaken to 6.85 per dollar this year, with a potential to hit 7 next year.
I don’t think this is an end to recent yuan depreciation
BO ZHUANG, SENIOR SOVEREIGN ANALYST AT LOOMIS SAYLES INVESTMENTS ASIA