Yuan slips as weak inflation fans growth concerns

HONG KONG —

China’s yuan weakened slightly against the dollar on

Wednesday, as factory gate prices went backwards and consumer

inflation slowed, adding to traders’ concerns about demand and

the economic outlook.

The People’s Bank of China set the midpoint rate

at 7.2189 per dollar prior to market open, weaker than the

previous fix 7.215.

In the onshore market, the yuan opened at 7.2322

per dollar and was changing hands at 7.2464 at midday, 144 pips

away from the previous late session close and 0.38% away from

the midpoint. The spot rate is currently allowed to trade within

a 2% band above or below the official fixing on any given day.

The global dollar index rose to 109.681 from the

previous close of 109.636, as traders awaited results from U.S.

mid-term elections and inflation data.

China reported on Wednesday its producer price index fell

1.3% year-on-year in October, its first drop since December

2020, underlining production disruptions amid strict COVID curbs

and a weak property sector.

The consumer price index (CPI) climbed 2.1% year-on-year,

cooling from a 2.8% rise in September and slower than analysts’

forecast.

“China’s weak activity data, soft non-food price inflation

indicates an economy suffering from weak demand,” said Stephen

Innes, managing partner at SPI Asset Management.

The soft inflation means authorities may be more comfortable

with yuan weakness, albeit at a pace that does not encourage

outflows, he said.

A trade-weighted yuan basket index complied by China Foreign

Exchange Trade System, the which tracks the onshore yuan against

24 foreign currencies, fell to 98.63, lowest since Sept. 10,

2021.

The offshore yuan was trading at

7.2463

per dollar, close to the onshore spot rate.

The market has seized on incremental policy adjustments as

evidence that China is preparing for an eventual economic

reopening. Such bets had triggered the biggest jump on record in

the offshore yuan last week.

However, “optimism on the China reopening was waning as the

COVID resurgence in reality fueled concern over the escalation

in lockdowns, especially in the Guangdong province,” said Ken

Cheung, chief Asian FX strategist at Mizuho Bank.

“We pay attention to the possible disinflation trend driven

by weakening demand amid the zero-COVID policy and property

downturn,” he said.

Offshore one-year non-deliverable forwards contracts

(NDFs), considered the best available proxy for

forward-looking market expectations of the yuan’s value, traded

at 7.0468, 2.44% away from the midpoint.

One-year NDFs are settled against the midpoint, not the spot

rate.

The yuan market at 4:37AM GMT:

ONSHORE SPOT:

Item Current Previous Change

PBOC midpoint

7.215 -0.05%

7.2189

Spot yuan

7.232 -0.20%

7.2464

Divergence from

midpoint*

0.38%

Spot change YTD

-12.30%

Spot change since 2005

revaluation 14.22%

Key indexes:

Item Current Previous Change

Thomson

Reuters/HKEX 0.0

CNH index

Dollar index

109.64 0.0

109.636

*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 percent from official midpoint rate it sets each

morning.

OFFSHORE CNH MARKET

Instrument Current Difference

from onshore

Offshore spot yuan

* 0.00%

7.2463

Offshore

non-deliverable 2.44%

forwards 7.0468

**

*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 Georgina Lee. Editing by Sam Holmes)