Aug 19 2024: On Monday, the yuan experienced its most significant gain in two weeks, driven by broad-based dollar selling as investors anticipated U.S. interest rate cuts. However, the yuan weakened against a strengthening yen.
China’s currency climbed to 7.1314 per dollar during afternoon trading and ended the day about 0.4% stronger at 7.1363, marking its largest one-day increase since early August.
This rally places the yuan back in the middle of its daily trading range—after spending months near the lower end—though this shift is largely due to a weakening dollar rather than an improvement in market sentiment.
Despite the gains, the yen’s strength continued to pressure the yuan against a basket of trading partners’ currencies, with the yuan dropping to 98.07, its lowest level since January 15, based on Reuters’ calculations from official data. The yuan also fell 1% against the yen, reaching 20.38, its steepest drop since August 5.
Investors are now looking ahead to China’s loan prime rate decisions on Tuesday, set against a backdrop of declining bank lending, falling home prices, and economic uncertainty, which analysts believe will limit further gains for the yuan.
Analysts at the Commonwealth Bank of Australia (CBA) commented, “The weak prospects for the Chinese economy and expectations for additional monetary policy easing will undermine investor confidence in Chinese assets and, in turn, reduce demand for the yuan.”
They added that the yuan “is unlikely to benefit much from a decline in the U.S. dollar driven by an improving global economy.”
Globally, Federal Reserve Chair Jerome Powell is expected to advocate for rate cuts in a speech on Friday. In the bond market, yields on Chinese government 10-year bonds fell by 1.8 basis points to 2.17%, while the yield on comparable U.S. government bonds stood at 3.9%.
The onshore yuan 7-day benchmark repo rate was 1.74%, and in the forwards market, the three-month yuan was quoted at 7.0695, 722 pips stronger than the spot rate. Three-month CNH forwards were quoted at 7.0682 per dollar.
On Monday, the People’s Bank of China set the midpoint rate, around which the yuan is allowed to trade within a 2% band, at 7.1415 per dollar, 133 pips firmer than Reuters’ estimate.
Key Onshore vs Offshore Levels:
Overnight dollar/yuan swap onshore: -7.25 pips vs. offshore -7.25 pips
Three-month SHIBOR: 1.8% vs. three-month CNH HIBOR 2.2%
Levels at 07:00 GMT:
Spot yuan: 7.1417, up 0.33%, with a day’s high of 7.1314 and a low of 7.1585.
Offshore yuan spot: 7.1411, up 0.3%, with a day’s high of 7.1278 and a low of 7.1641.
