Mar 22 2024: The Chinese yuan experienced a decline to a four-month low against the dollar on Friday amid expectations of monetary easing, breaching a significant threshold and prompting state-owned banks to step in and support the currency.
In early trades, the onshore yuan fell below the psychologically important level of 7.2 per dollar, reaching a low of 7.24, its weakest level since Nov. 17, 2023. However, by the end of onshore trading, these weaker levels were no longer visible on the charts, with the day’s low at 7.2303 according to LSEG Eikon data.
Market sources informed Reuters that state banks intervened by buying yuan for dollars. The yuan closed at 7.2275 by the end of the domestic session (0830 GMT), 281 pips softer than the previous late session close.
The sources requested anonymity as they are not authorized to speak publicly about market trades.
Over the past three months, the yuan has depreciated by approximately 2%, under pressure from growing expectations of additional monetary easing to bolster China’s economy, along with a weaker Japanese yen.
Carlos Casanova, senior economist for Asia at UBP, noted that the strengthening dollar and the sharp depreciation in the yen and some Asian currencies following the Bank of Japan’s decision to end its negative interest rate policy have contributed to the yuan’s weakness.
“The market seems to believe that Asian currencies should depreciate further against the U.S. dollar until the Federal Reserve announces interest rate cuts,” he explained.
Before the market opened, the People’s Bank of China (PBOC) set the midpoint rate, around which the yuan is allowed to fluctuate within a 2% band, at 7.1004 per dollar, 62 pips weaker than the previous fix of 7.0942.
Traders noted that the Chinese central bank has consistently set the rate at levels stronger than market expectations in recent months.
The offshore yuan also weakened to 7.2723 in late Asian trade, marking its lowest level since Nov. 14, 2023.
The sudden decline in the yuan is attributed to rising expectations of monetary easing following hints from senior PBOC officials about further potential reductions in bank reserve requirements.
Ju Wang, head of Greater China FX and rates strategy at BNP Paribas, anticipates that the central bank’s signals regarding additional monetary easing will lead to the yuan testing lows around 7.3 again.
The yuan’s unexpected weakness also impacted stock markets, with the benchmark Shanghai stock index falling by 1%.
Casanova noted that if China allows the yuan to depreciate from 7.2 to 7.3, it would complicate the continuation of the equity rally as investors may seek to diversify into U.S. dollar exposure.