SHANGHAI (Reuters) -China’s yuan ended at a fresh 26-month low on Monday and traded below the psychologically critical 7-per-dollar level, pressured by bets for another big rate hike from the U.S. Federal Reserve later this week.
The onshore yuan finished the domestic trading session at 7.0179 per dollar, its weakest close since July 14, 2020, and 474 pips or 0.68% weaker than the previous late-night close of 6.9705.
Its offshore counterpart traded at 7.0220 around 0830 GMT.
Before the market opened, the People’s Bank of China (PBOC) set the midpoint rate at 6.9396 per dollar, 91 pips or 0.13% weaker than the previous fix of 6.9305 on Friday.
However, the official guidance came in firmer than market projections, traders and analysts said, continuing a trend seen since late August that market participants interpret as a bid to slow the yuan’s slide.
“The strong fixing bias could also be an attempt to offset the pressure from the net open market operation (OMO) injection on the yuan,” analysts at Maybank said in a note.
The PBOC injected a net 12 billion yuan ($1.71 billion) through short-term liquidity tools on Monday to counteract quarter-end higher cash demand, while also lowering the borrowing cost of 14-day reverse repos.
Higher cash injections and lower interest rates should naturally pressure the currency, analysts said.
Currency traders said the yuan remained under pressure ahead of a slew of global central bank meetings this week, where the Fed and the Bank of England are expected to further hike rates. [FRX/]
China, along with Japan, has been a major outlier in a global run of interest rate hikes to tame inflation, with Beijing focused on reviving an economy hurt by COVID-19 shocks.
But such widening policy divergence weighed on the yuan and limited room for Beijing to further maneuver monetary easing. A Reuters poll showed that China is expected to keep lending benchmarks unchanged on Tuesday, with authorities seen holding off monetary easing in the short-term to avoid more depreciation pressure.
“Different from the past few rounds of RMB depreciation, the collapse of RMB forward points makes RMB short easy to hold due to positive carry,” analysts at OCBC Bank said in a note.
“This will make China’s counter-cyclical measures less effective to stop RMB depreciation than what they did before.”
One-year dollar/yuan swap points traded in the forward market hovered at a 12-year low of -1,445 points on Monday.
Instead, state media have increasingly warned the market of strong one-way bets against the local currency, with traders and analysts viewing them as part of official attempts to rein in excess yuan weakness.
Wang Chunying, spokesperson of the State Administration of Foreign Exchange (SAFE), was quoted by the state broadcaster CCTV on Friday urging companies not to speculate on the currency.
The CCTV also quoted unnamed sources close to the central bank as saying that the yuan will remain basically stable.
(Reporting by Winni Zhou and Brenda Goh; Editing by Sam Holmes and Devika Syamnath)
