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China's yuan heads for worst month since 2019 as lockdown gloom deepens

reuters.com · 04/29/2022 05:09
China's yuan heads for worst month since 2019 as lockdown gloom deepens

Updates domestic closing prices, adds comments and details

- China's yuan swung wildly on Friday, touching a 1-1/2-year low before recovering its losses by the domestic close, but it remained on track for its biggest monthly drop in nearly two years as risks to the economy grow.

Global investment houses rushed to cut their yuan forecasts, with optimism souring amid extended COVID-19 lockdowns in many Chinese cities and expectations for aggressive U.S. interest rate rises starting next week.nL3N2WP234

Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate CNY=PBOC at a 1-1/2-year low of 6.6177 per dollar, 549 pips or 0.83% weaker than the previous fix of 6.5628.

But analysts and traders said the official guidance rate mostly came in line with market projections this week. Any big discrepancies between their forecasts and the PBOC's fixing are closely watched by investors for clues on possible shifts in foreign exchange policy.

In the spot market, the onshore yuan CNY=CFXS weakened to a low of 6.6520, the weakest level since Nov. 5, 2020. But it later reversed course to finish the domestic session at 6.5866 per dollar, up 389 pips or 0.6% from the previous late night close of 6.6255.

Its offshore counterpart CNH=D3 traded at 6.61 per dollar around 0830 GMT.

If the onshore yuan finishes the late night session at the domestic closing level, it would still book a monthly loss of 3.75% against the dollar, the biggest monthly drop since August 2019, when tensions between the world's two largest economies intensified.

The sharp intra-day turnaround in the yuan came after the Politburo, a top decision-making body of the ruling Communist Party, said China will step up policy support to stabilise the slowing economy. Though it offered no details, it helped shore up sentiment in the yuan and battered Chinese stock markets.nB9N2W4009

"The most important message is a change of policy priority," said Zhang Zhiwei, chief economist at Pinpoint Asset Management.

"In the past few weeks the top priority seems to be containing Omicron outbreaks. Now the goal is to balance containing outbreaks and economic growth."

The official remarks offered some relief for financial markets, after many investors had raised doubts about China hitting this year's growth target of about 5.5% as a wave of COVID-19 induced lockdowns weighed on activity.

While the central bank has yet to show much apparent discomfort over the recent yuan slide, despite a reduction to the amount of foreign exchange banks must set aside as reserve earlier this week, some investors were worried that authorities could step in any time soon.

Several traders said they received a growing numbers of queries from their corporate clients about liquidating their dollar holdings on Friday.

"We acknowledge that a sharp crash in RMB CFETS is unlikely without the trade balance coming off sharply or service deficit widening with a vengeance," Citi analysts said in a note.

"But with the broad USD strengthening sharply, USD/CNH can push towards 6.80-6.85 zone."

The Yuan CFETS basket index .CFSCNYI, a gauge that measures the yuan's value against its major trading partners, stood at 103.24, up 0.76% so far this year.

That compared with spot yuan's year-to-date loss of 3.5% to the dollar, with most of the decline taking place over the past two weeks.

China's capital Beijing closed more gyms, malls, cinemas and apartment blocks on Friday, with authorities ramping up contact tracing to contain a COVID outbreak, while public resentment over a draconian month-long lockdown in Shanghai continued to grow. nL3N2WR0GJ




(Reporting by Winni Zhou and Andrew Galbraith; Editing by Kim Coghill)

((winni.zhou@thomsonreuters.com; +86 21 2083 0100; Reuters Messaging: winni.zhou.thomsonreuters.com@reuters.net))