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China's yuan hits week low as large Fed hike looms

China's yuan hits week low as large Fed hike looms

Reuters · 09/14/2022 01:08
China's yuan hits week low as large Fed hike looms

- China's yuan steadied after slipping to a one-week low early on Wednesday, as hotter-than-expected U.S. inflation raised bets for even more aggressive Federal Reserve tightening.

The dollar index =USD recorded its biggest one-day percentage gain in two years after U.S. consumer prices unexpectedly rose in August and underlying inflation accelerated. That reinforced expectations the Fed will deliver a third 75-basis-point rate hike week. FRX/

The strong dollar pressured emerging market currencies, prompting the People's Bank of China (PBOC) to continue setting firmer-than-expected guidance to rein in the yuan's weakness.

The PBOC set the midpoint rate CNY=PBOC at 6.9116 per dollar, 190 pips or 0.27% weaker than the previous fix of 6.8928, but was firmer than market projections.

In the spot market, the onshore yuan CNY=CFXS opened at 6.9654 per dollar and fell to a low of 6.9738 at one point, the weakest since Sept. 7. By midday, it was changing hands at 6.9645, 45 pips firmer than the previous late session close.

Its offshore counterpart CNH=D3 followed suit by weakening to a one-week low of 6.9850 per dollar in morning trade, after booking its worst session in a month overnight. It last traded at 6.9721 around midday.

Currency traders said both onshore and offshore yuan could test the psychologically critical 7 per dollar mark again soon if strength in the greenback persists.

"It's just a matter of time before the yuan breaches the key 7," said a trader at a Chinese bank.

A second trader at a foreign bank that the market saw strong support around 6.97 per dollar, as some corporate clients convert their FX receipts into yuan as they bet state banks could step in to prop up the currency before the key threshold.

"The 7 psychological level is important to the CNY in the term, as the abrupt breakthrough above 7 in the midst of strong USD rally will risk a one-way movement in the RMB market, which is the situation that the PBOC attempts to avoid, especially before the 20th Party Congress," said Ken Cheung, chief Asian FX strategist at Mizuho Bank.

The politically significant Party Congress is scheduled to start on Oct. 16.

The central bank's medium-term policy loan operation on Thursday is also on the radar, with traders and analysts widely expecting the PBOC to pause monetary easing. The PBOC's widening policy divergence with the Fed could put further pressure on the yuan and risk capital outflows, they said.


The yuan market at 0400 GMT:


ONSHORE SPOT:

Item

Current

Previous

Change

PBOC midpoint CNY=SAEC

6.9116

6.8928

-0.27%

Spot yuan CNY=CFXS

6.9645

6.969

0.06%

Divergence from midpoint*

0.77%

Spot change YTD



-8.75%

Spot change since 2005 revaluation


18.84%


Key indexes:

Item

Current

Previous

Change

Thomson Reuters/HKEX CNH index



0.0

Dollar index

109.765

109.815

-0.1


*Divergence of the dollar/yuan exchange rate. Negative 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.


OFFSHORE CNH MARKET

Instrument

Current

Difference from onshore

Offshore spot yuan CNH= *

6.9721

-0.11%

Offshore -deliverable forwards CNY1YNDFOR= **

6.8837

0.41%


*Premium for offshore spot over onshore CNY=CFXS

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


(Reporting by Winni Zhou and Brenda Goh; Editing by Jacqueline Wong)

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