Jan 2, 2024: China’s yuan faced pressure against the dollar on the year’s inaugural trading day, influenced by growing expectations of monetary easing following indications of uneven factory activity in the world’s second-largest economy.
Official data revealing a third consecutive month of contraction in China’s manufacturing sector for December, coupled with an unexpected softening, has bolstered assumptions of imminent policy support.
Economists at Capital Economics predict ongoing policy support, citing indications from the Central Economic Work Conference in December hinting at forthcoming fiscal and monetary measures to stimulate the economy.
The recent downward adjustment of deposit rates by major banks is seen as a precursor to further cuts in lending rates, with forecasts suggesting potential policy rate reductions of 20 basis points and an additional reserve requirement ratio (RRR) cut in the first half of 2024.
Before trading commenced, the People’s Bank of China (PBOC) established the midpoint rate at 7.0770 per dollar, marginally firmer than the prior fix, maintaining a trend observed throughout 2023 of setting guidance rates at levels stronger than market projections, a move interpreted as stabilizing the yuan.
In the spot market, the onshore yuan began at 7.1072 per dollar, later trading at 7.1262 by midday, showcasing a decline of 2.8% against the dollar in 2023 amid economic recovery hurdles and diverging monetary policies.
As the U.S. Federal Reserve hints at potential rate cuts, market analysts anticipate a convergence in yield differentials between the U.S. and China, potentially alleviating pressure on the Chinese currency.
By midday, the global dollar index was at 101.545, and the offshore yuan was exchanging at 7.132 per dollar, reflecting ongoing market sentiment amid evolving expectations regarding Fed rate adjustments.