As of 0251 GMT, the onshore yuan was 0.05% lower at 7.2986 to the dollar, not far from the psychologically important 7.3 per dollar mark and a 13-month low of 7.2999 hit last week. The offshore yuan traded at 7.305 yuan per dollar. Yield differentials between China and the United States widened on the back of market expectations of a slower path of interest rate reductions in the United States and fast falling Chinese yields.
The yield gap between China’s benchmark 10-year government bonds and their U.S. counterpart widened to the highest in 24 years this week. The divergent yield moves prompted money to chase dollar-denominated assets for higher returns and pressured the Chinese yuan.
“Chinese government bond (CGB) yields and repo-IRS have been falling steadily over the past month, amid a weak growth outlook and expectation for additional monetary easing,” said Frances Cheung, head of FX and rates strategy at OCBC Bank. “The monetary stance has been changed to “moderately loose”.
Even when the stance was “prudent” there was some monetary easing, and hence the explicit change in the wordings gives high hope for more monetary support to come, including outright interest rate cuts.
Cheung, referring to China’s first easing of its monetary stance in 14 years, said she expected a total of 40 basis points reduction in the one-year loan prime rate (LPR) and 100 basis points cut in banks’ reserve requirement ratio (RRR) next year. Earlier in the session, China’s central bank conducted a medium-term loan operation while keeping the interest rate unchanged. Prior to the market opening, the People’s Bank of China (PBOC) set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1868 per dollar, and 1,113 pips firmer than a Reuters’ estimate of 7.2981. The central bank has been setting its official midpoint fixings on the firmer side of the key 7.2 per dollar level and stronger than market projections since mid-November, which traders and analysts widely interpret as a sign of rising unease over recent yuan declines. Keeping the fixing on the firmer side of 7.2 per dollar can effectively set a floor for the yuan near 7.35, traders and analysts said. “The USD/CNY continues to be restrained under its 7.35 cycle high,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.
“The PBOC could continue to defend the exchange rate into the Lunar New Year,” Tan said, adding the yuan’s movements will also be dependent on U.S. President-elect Donald Trump’s trade policy with China when he takes the office in January. The week-long Lunar New Year holiday will start on Jan. 28 next year.
Key onshore vs offshore levels: * Overnight dollar/yuan swap onshore -5.50 pips vs. offshore -5.50 * Three-month SHIBOR 1.7 % vs. 3-month CNH HIBOR 3.4 % LEVELS AT 0251 GMT: INSTRUMENT CURRENT UP/DOWN(-) % CHANGE DAY’S HIGH DAY’S vs USD VS. PREVIOUS YR-TO-DATE LOW CLOSE % Spot yuan 7.2986 -0.05 -2.7 7.295 7.2988 Offshore 7.3050 0.03 -2.45 7.3024 7.3024 yuan spot.
