- Currency is being pressured by prospect of rate cuts: Maybank
- PBOC’s level of concern may not be 7, but 7.3, Nomura says
According to a Bloomberg article published on May 17, 2023, the yuan slid past the key level of 7 per dollar for the first time this year in a further sign the recovery of the world’s second-largest economy from its Covid restrictions is grinding to a halt.
The currency weakened past the key threshold in both onshore and offshore trading after data this week showed factory output, retail sales and fixed-asset investment all grew at a slower pace in April than economists forecast. The nation’s benchmark stock gauges are trailing their major Asian peers this quarter, while sovereign bonds have rallied on expectations of more easing.
“We had thought that stronger sentiment thanks to China’s abrupt reopening and the subsequent improvement in some economic data points would strengthen the yuan, but this has not materialized,” said Kiyong Seong, lead Asia macro strategist at Societe Generale Hong Kong Branch. “The threshold for market players to position for a stronger yuan turned out to be much higher than we expected.”
About six months after China abruptly ended its Covid curbs, optimism over the rebound in the nation’s economy that had buoyed yuan assets is now running into a reality check. The currency has fallen more than 4% from its high in January as traders lose patience with the lackluster economic data.
The offshore yuan slipped as much as 0.3% to 7.0201 per dollar Wednesday, extending this year’s decline to 1.3%. The onshore currency dropped as much as 0.4% to 7.0026.
China’s still massive trade surplus is failing to translate into yuan strength, with the nation’s relatively unattractive yields compared with those in the US a bigger deterrent.
Exporters also appear hesitant to sell dollars on concern the yuan may keep falling. Some have been selling short-dated yuan put options as a way to lock in a better price, according to traders who asked not to be named as they are not authorized to speak publicly.
So far at least, the People’s Bank of China has been staying on the sidelines — both in the foreign-exchange market and with its liquidity operations. On Wednesday, it refrained from helping sentiment by issuing a stronger reference rate for the yuan, and it also avoided cutting the interest rate on its policy loans earlier this week.
“With no signs that the PBOC is making any attempt to push against yuan weakness for now — this has emboldened the bears,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. in Singapore. But “don’t forget, the PBOC has a lot of tools they can employ, and market participants will likely be cautious trying to push yuan weakness too far,” he said.
The PBOC set the currency’s fixing, which limits the onshore yuan’s moves by 2% on either side, at 6.9748, broadly in line with the forecast in a Bloomberg survey of analysts and traders. Bloomberg’s guage of the greenback climbed 0.2% Tuesday as improving US data pushed up Treasury yields.
Psychological Hurdle
PBOC Governor Yi Gang said in a March the level of 7 per dollar was no longer a psychological hurdle for the yuan, as the exchange-rate mechanism has been increasingly flexible and more volatility hasn’t been a problem for businesses or households. China has largely ended currency intervention, he said in April.
The PBOC has plenty of ways to curb yuan weakness whenever it grows uncomfortable. The central bank usually uses the fixing to guide expectations, it used to jawbone the currency and it may become more aggressive by increasing the cost for traders to short the yuan.
Right now, there are as yet few signs of discontent over the yuan’s weakness, according to Nomura Holdings Inc.
“The PBOC’s level of concern may not be 7.0, but instead more towards 7.30,” and the likelihood of intervention is low in the near term, strategists at the bank led by Craig Chan in Singapore wrote in a research note.
