SHANGHAI — China’s yuan fell to a
27-month low against a surging dollar on Thursday after the US
Federal Reserve delivered another 75 basis-point interest rate
rise and signaled more hikes in coming months.
Fed Chair Jerome Powell vowed on Wednesday that he and his
fellow policymakers would “keep at” their battle to beat down
inflation. In a sobering new set of projections, the Fed
foresees its policy rate rising at a faster pace and to a higher
level than expected.
The Fed’s more hawkish stance than many market participants
had anticipated pushed the dollar to a fresh two-decade high and
put pressure on emerging market currencies.
Prior to market opening, the People’s Bank of China (PBOC)
set the midpoint rate at 6.9798 per dollar, 262 pips
or 0.38% weaker than the previous fix of 6.9536, the softest
since Aug. 4, 2020.
But the official guidance came in much stronger than market
projections for a 21st straight trading day, traders and
analysts said, noting this was part of an official attempt to
stem fast yuan declines. Thursday’s midpoint was 148 pips firmer
than Reuters’ estimate of 6.9946.
“The dollar was too strong,” said Ken Cheung, chief Asian FX
strategist at Mizuho Bank.
“This round of yuan depreciation was triggered by the
buoyant dollar, and the midpoint fixing should remain the key
tool (to stabilize the market).”
In the spot market, the onshore yuan opened at
7.0801 per dollar and fell a low of 7.0954, the weakest level
since June 17, 2020. It traded at 7.0891 by midday, 414 pips
softer than the previous late session close.
Its offshore counterpart breached the key 7.1 per
dollar level before trading at 7.0977 per dollar around midday.
“The PBOC is likely to continue to lean against the move (in
USD/CNY) higher, but is unlikely to try to stabilize USD/CNY if
the broad USD continues to gain,” Lemon Zhang, FX strategist at
Barclays, said in a note.
“Going forward, we expect the PBOC to adopt more
counter-cyclical policy choices from its toolkit, especially
ahead of the Party Congress on October 16, such as further FX
reserve requirement ratio (RRR) cuts and stronger CNY bias in
the daily fixing.”
Zhang expects the yuan to hit 7.15 by the fourth quarter of
China lowered the FX RRR earlier this month to slow the pace
of yuan losses, and investors widely expect the authorities to
roll out more policy measures should the weakness be sustained.
Some currency traders said the 7.1 per dollar level should
continue to offer strong resistance to the onshore market, as it
was not far from the lower end of the daily trading band of
China’s onshore yuan can only trade in a narrow range of 2%
around the daily midpoint fixing, and Thursday’s guidance rate
capped the range to between 6.8402 and 7.1194.
“The hard defense line could be around 7.18 per dollar for
this round of depreciation,” said a trader at a foreign bank.
The trader said the level was last hit during the height of
Sino-US trade tensions in 2019 and has also acted as a floor
for the yuan since the global financial crisis of 2008.
The yuan market at 0400 GMT:
Item Current Previous Change
PBOC midpoint 6.9798 6.9536 -0.38%
Spot yuan 7.0891 7.0477 -0.58%
Divergence from 1.57%
Spot change YTD -10.36%
Spot change since 2005 16.75%
Item Current Previous Change
Dollar index 111.614 110.642 0.9
*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
OFFSHORE CNH MARKET
Instrument Current Difference
Offshore spot yuan 7.0977 -0.12%
Offshore 6.9703 0.14%
*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; Editing by Ana
Nicolaci da Costa and Richard Pullin)