China’s yuan weakened past the closely watched 7.2-per-dollar level as investor sentiment soured on a lack of aggressive stimulus and Beijing signaled a level of comfort about the declines.
(Bloomberg) — China’s yuan weakened past the closely watched 7.2-per-dollar level as investor sentiment soured on a lack of aggressive stimulus and Beijing signaled a level of comfort about the declines.
The offshore yuan fell as much as 0.3% to 7.2007 per dollar on Wednesday, the weakest since November, while the onshore unit declined 0.2%. The yuan has tumbled more than 4% over the last three months to become the worst performer in Asia after the yen.
The People’s Bank of China set its fixing for the managed currency at a level that was slightly weaker than the average estimate in a Bloomberg survey, stoking bets Beijing is on board with yuan depreciation amid a flagging economy. Local banks delivered only a modest reduction to key lending rates on Tuesday, disappointing traders anticipating stronger support measures after authorities cut a string of policy rates last week.
“Markets are growing impatient over lack of follow-through on China stimulus,” said Christopher Wong, strategist at Overseas Chinese Banking Corp. Resistance for the offshore yuan is at 7.2150, he added. “A timeline to look forward to is the Politburo’s semi-annual economic conference in end July for any major fiscal announcement. But in the meantime, the silence is deafening.”
China’s economic recovery since the dismantle of its Covid curbs has been unimpressive, with the nation’s manufacturing sector contracting and retail sales trailing estimates in May. Beijing’s slow stimulus rollout is adding to concerns about the economy and investors continue to debate what steps authorities will take to reignite growth.
Holiday Effect
Yuan’s breach of the 7.2 hurdle came as currency traders position for the semiannual testimony by Federal Reserve Chairman Jerome Powel before Congress on June 21-22. Hong Kong is shut for a holiday tomorrow while onshore China markets will be closed Thursday and Friday.
“The creep-up in US Treasury yields ahead of Powell’s testimony that could see him utter more hawkish comments that could spur hawkish re-pricing and strengthen the dollar further,” said Fiona Lim, senior foreign exchange strategist at Malayan Banking Bhd. in Singapore.
Chinese stocks led losses in Asia on Wednesday, weighing further on the yuan. A gauge of the nation’s equities listed in Hong Kong slumped as much as 2%, set for a third day of declines.
The selloff is just a “continuation of the weak sentiment” as stimulus hopes have been dashed, said Willer Chen, a senior research analyst at Forsyth Barr Asia. “Holiday effect” could be part of reason behind the weakness too, he added.
Policy Signal
With strategists from Goldman Sachs Group Inc. to Mizuho Bank Ltd. flagging 7.20 as a potential soft floor for the yuan, traders will be watching to see if the currency’s weakness can be slowed. Sentiment in the options market shows some small signs of optimism even if the broader mood remains negative.
The yuan fixings so far “are not strong enough to drive market expectation on PBOC’s presence to support the yuan” and market participants could be treading water at around 7.20 to check signals of currency defense from the central bank, said Ken Cheung, chief Asian FX strategist at Mizuho Bank Ltd.
China set the yuan’s reference rate at 7.1795 per dollar Wednesday, weakest since November 29. The fixing limits moves of the onshore yuan by 2% on either side.
–With assistance from Zhu Lin and Karl Lester M. Yap.
(Updates to add comments on Fed testimony, China holiday and PBOC fixing signals from the sixth paragraph. An earlier version of the story corrected the move in the onshore yuan in the second paragraph.)
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