(Reuters) – SHANGHAI, July 16 – On Friday, China’s yuan weakened against the dollar, which was supported by forecasts for faster interest rate hikes in the United States and safe-haven demand from investors around the world due to fears of resurgences of coronavirus infections in other countries.
Despite the drop, the yuan was expected to rise for the week, ending a six-week losing run, as a spate of recent data suggested China’s economic recovery had peaked but remained on pace, assuaging some concerns about the world’s second largest economy.
The People’s Bank of China (PBOC) set the midpoint rate at 6.4705 per dollar before the market opened, down from 6.4640 the day before.
The onshore yuan began at 6.4650 per dollar in the spot market and was trading at 6.4654 at lunchtime, down 39 pips from the previous late session finish.
If the yuan ends the late night session at the noon level, it will have gained 0.2 percent against the dollar this week, reversing a six-week losing streak.
As investors sought signals to the authorities’ policy position, several dealers said the yuan’s overall trend continued to follow the dollar’s moves but swung in a narrower range.
Following the PBOC’s surprise drop in banks’ reserve requirement ratio (RRR) while partially rolling over maturing medium-term loans on Thursday, market participants are split on whether the benchmark loan prime rate (LPR) will be lowered at its monthly fixing due next Tuesday.
Some investors saw the changes as pre-emptive attempts to fine-tune liquidity levels in the banking system, while others saw them as a dovish tilt to prop up the economy.
In a note, Li Wei, senior China economist at Standard Chartered in Shanghai, stated, “We retain our view that the medium-term lending facility (MLF) rate would be kept at 2.95 percent through Q3-2023, followed by a 10 basis point raise in Q4.”
“However, we believe the one-year LPR will fall by 5 basis points on July 20 and another 5 basis points during the remainder of 2021 as a result of the RRR cuts and the new regulations implemented in June that decreased interest rate limitations for term deposits longer than one year.”
Meanwhile, the LPR is likely to remain stable this month, according to OCBC Wing Hang Bank and MUFG Bank.
The global dollar index gained to 92.578 by midday, up from 92.573 at the previous closing, while the offshore yuan was trading at 6.466 per dollar.
At 0411 GMT, the yuan market was as follows:
PBOC midpoint 6.4705 6.464 -0.10 percent ONSHORE SPOT: Item Current Previous Change PBOC midpoint 6.4705 6.464 -0.10 percent
6.4654 6.4615 -0.06 percent spot yuan
Spot change YTD 0.97 percent, divergence from -0.08% midpoint*
Since 2005, there has been a spot change. Revaluation of 28.01 percent
Indexes that are important:
Item Previous Change Previous Item
98.42 98.4 0.0 98.42 98.4 0.0 98.42 98.4
Dollar index 92.578 92.573 0.0 Reuters/HKEX CNH index Dollar index 92.578 92.573 0.0
*The exchange rate between the US dollar and the Chinese yuan has diverged. If the figure is negative, it means the spot yuan is trading higher than the midpoint.
The People’s Bank of China (PBOC) allows the official midpoint rate, which it sets each morning, to climb or fall by 2%.
CNH MARKET OFFSHORE
Instrument Current Distinction from the Onshore
Offshore spot yuan 6.466 -0.01% * Offshore 6.6216 -2.28 percent non-deliverable forwards ** Offshore 6.6216 -2.28 percent non-deliverable futures
*Premium for an offshore location over an onshore location **
Since non-deliverable forwards are settled against the midpoint, the figure indicates the discrepancy from the PBOC’s official midpoint.
(Winni Zhou and Andrew Galbraith contributed reporting; Simon Cameron-Moore edited the piece.)/n
