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China's yuan slips to 2-week low as dollar jumps on inflation data

reuters.com · 06/13/2022 01:10
China's yuan slips to 2-week low as dollar jumps on inflation data

- China's yuan slipped to a more than two-week low against the dollar on Monday after soaring U.S. inflation pushed up Treasury yields and lifted the greenback to its highest in four weeks against a basket of peers.

Data released on Friday showed U.S. consumer prices had jumped in May, fueled by record gasoline prices and increasingly costly services, raising the prospect of continued aggressive policy tightening by the Federal Reserve. nL1N2XW25Z

With the Fed widely expected to announce a second 50-basis-point rise in interest rates on Wednesday, traders said the yuan would continue to face pressure in the near term. Traders and analysts also flagged a widening spread between the onshore yuan and its more freely traded offshore counterpart as an indication of market concern.

"Offshore-onshore spread has widened to around 170 pips ... versus near-neutral levels in early-Jun, with regional risk aversion on display," analysts at Maybank said in a note. But they added that stronger-than-expected yuan fixings by the central bank suggested "resistance against overly sharp yuan depreciation."

Market pricing indicates roughly a two-thirds chance of at least 125 basis points of hikes across the Fed's next two meetings, according to the CME's FedWatch tool.

"If the Fed's stance is more hawkish than expected, the yuan could test the 6.8 mark if the U.S. index breaks through the year's highs. But a sharp depreciation is unlikely," said a trader at a Chinese bank.

Traders said tightening policy by the European Central Bank and others might limit the upside of the dollar index. The Bank of England is expected to announce its fifth interest rate hike since December this week. nL8N2XW2EX

While many global central banks are raising interest rates to combat inflation, Chinese authorities remain focused on stabilising a slowing economy. A surge in new bank lending in May illustrated policymakers' attempts to pull the economy out a slump exacerbated by COVID-19 lockdowns. nL1N2XX0KR

China's one-year dollar/yuan swaps CNY1Y=CFXS dropped deeper into negative territory on Monday, reflecting the policy divergence between the world's two largest economies.

One-year swap points touched a low of -295 points, the lowest since January 2019.

Before the market open, the People's Bank of China (PBOC) set the yuan's daily midpoint fixing at CNY=PBOC at 6.7182 per dollar, its weakest since May 27.

Spot yuan CNY=CFXS opened at 6.7350 per dollar and slipped to 6.7382 around midday, 301 pips weaker than Friday's late session close.

The offshore yuan CNH=D3 was more than 200 pips weaker than its onshore counterpart, softening to 6.7574 per dollar from a close of 6.7330 on Friday.

Offshore one-year non-deliverable forwards contracts (NDFs)CNY1YNDFOR=, considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.7576.

The yuan market at 4:21AM GMT:






PBOC midpoint CNY=SAEC




Spot yuan CNY=CFXS




Divergence from midpoint*


Spot change YTD


Spot change since 2005 revaluation


Key indexes:





Thomson Reuters/HKEX CNH index




Dollar index




*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.




Difference from onshore

Offshore spot yuan CNH= *



Offshore non-deliverable forwards CNY1YNDFOR= **



*Premium for offshore spot over onshore CNY=CFXS

**Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. CNY=SAEC.

(Reporting by Andrew Galbraith in Shanghai and Xiao Han in Beijing; Editing by Bradley Perrett)

((Andrew.Galbraith@tr.com; +86 21 2083 0079; Reuters Messaging: andrew.galbraith.thomsonreuters.com@reuters.net ; Twitter: https://twitter.com/apgalbraith))