China’s yuan hovers at 7-week low, market awaits clues from annual parliament

SHANGHAI — China’s yuan hovered at a

seven-week low against a firmer dollar on Thursday, under

downward pressure from expectations that the Federal Reserve is

likely to stay on its aggressive monetary tightening trajectory.

Policymakers at the U.S. central bank indicated that curbing

unacceptably high inflation would be the “key factor” in how

much further rates needed to rise, according to minutes from the

latest Fed policy meeting.

Before the market opening, the People’s Bank of China (PBOC)

set the midpoint fixing of the yuan at 6.9028 per

dollar, 269 pips or 0.39% weaker than the previous fix of

6.8759, the softest since Jan. 4. Thursday’s official fixing

came in line with market forecasts.

In the spot market, the onshore yuan opened at

6.8950 per dollar and was changing hands at 6.8860 at midday, 40

pips firmer than previous late session close.

“If the onshore spot yuan breaches the psychologically

important 6.9 per dollar on Thursday, the next key supportive

level would be 6.95,” said a trader at a Chinese bank, adding

that some of his peers were betting the yuan could soon test the

7 per dollar mark if weakness persisted.

Some analysts and market participants believe a breach of 7

yuan per dollar could trigger strong expectations of

depreciation and raise a risk of capital outflow.

The market is looking towards the annual parliamentary

gathering while also awaiting economic data for January and

February to gauge the health of the economy and the key goals

for this year.

January-February data, including imports and exports, will

be released in March. January data will be released only in

aggregation with February data, because the Lunar New Year

holiday shifts between the two months from year to year.

“China reopening optimism appears to be softening as

investors are awaiting the economic data releases for first two

months as well as the fresh policy guidance at the National

People Congress (NPC) in March,” said Ken Cheung, chief Asian FX

strategist at Mizuho Bank.

A sharp jump in short-term Chinese bond yields in response

to a swift dropping of pandemic curbs may be premature, analysts

say, pointing to the central bank’s policy intent and its

attempts to douse speculation of early tightening.

“We expect one more rate cut and one more reserve

requirement ratio (RRR) cut,” economists at JPMorgan said in a

note. An interest rate cut, possibly in April, could be

justified by benign inflation and a probably low growth in

first-quarter gross domestic product, they said.

The PBOC most recently cut interest rates in August and the

RRR in December.

At midday, the global dollar index stood at 104.413,

while the offshore yuan was trading at 6.8904 per

dollar.

The one-year forward value for the offshore yuan

traded at 6.7179 per dollar, implying a 2.57% appreciation

within 12 months.

The yuan market at 0250 GMT:

ONSHORE SPOT:

Item Current Previous Change

PBOC midpoint 6.9028 6.8759 -0.39%

Spot yuan 6.886 6.89 0.06%

Divergence from -0.24%

midpoint*

Spot change YTD 0.20%

Spot change since 2005 20.19%

revaluation

Key indexes:

Item Current Previous Change

Dollar index 104.413 104.585 -0.2

*Divergence of the dollar/yuan exchange rate. Negative number

indicates that spot yuan is trading stronger than the midpoint.

The People’s Bank of China (PBOC) allows the exchange rate to

rise or fall 2% from official midpoint rate it sets each

morning.

OFFSHORE CNH MARKET

Instrument Current Difference

from onshore

Offshore spot yuan 6.8904 -0.06%

*

Offshore 6.7193 2.73%

non-deliverable

forwards

**

*Premium for offshore spot over onshore

**Figure reflects difference from PBOC’s official midpoint,

since non-deliverable forwards are settled against the midpoint.

.

(Reporting by Winni Zhou and Brenda Goh)