China’s yuan has tumbled to its lowest level in four months, marking a decline of as much as 0.3% on Friday, breaching the key threshold of 7.20 per dollar that it had predominantly maintained since November. This move comes as the People’s Bank of China (PBOC) adjusted its daily reference rate for the managed currency by the most significant margin since early February, signaling to some analysts that Beijing may be endorsing further depreciation amidst a turbulent economic recovery.
While the PBOC has previously stabilized the currency with its daily fixing, recent weeks have witnessed mounting pressure amid a resurgence of the dollar and weakness observed in other Asian currencies such as the yen and Australian dollar. However, a sharp downturn in the yuan also prompts countermeasures from officials, including state bank intervention in dollar transactions or verbal reassurances.
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Sources speaking on condition of anonymity due to lack of authorization highlighted that the yuan has depreciated over 2% in the past three months. This decline has been fueled by growing market anticipation of additional monetary easing to support the world’s second-largest economy, as well as a softening Japanese yen.
Carlos Casanova, senior economist for Asia at UBP, attributed the yuan’s downward trend to the strengthening dollar and the yen’s rapid depreciation following the Bank of Japan’s termination of its negative interest rate policy. He emphasized, “The market appears to anticipate further depreciation of Asian currencies against the U.S. dollar until the Federal Reserve’s anticipated interest rate cuts.”
Ahead of market opening, the People’s Bank of China (PBOC) set the midpoint rate at 7.1004 per dollar, 62 pips weaker than the previous fix. Notably, the central bank has consistently set the rate at levels stronger than market projections for several months, traders noted.
Friday’s midpoint rate differed significantly from Reuters’ estimate, marking the largest discrepancy since November. Meanwhile, the offshore yuan continued its downward trajectory, reaching a low not seen in over four months at 7.2525.
The sudden depreciation of the yuan has also cast a shadow over stock markets, with the benchmark Shanghai stock index falling by 1.4%. Analysts caution that further devaluation of the yuan, especially towards the 7.2 to 7.3 range, could disrupt the ongoing equity rally as investors seek refuge in U.S. dollar assets.
Ju Wang, head of Greater China FX and rates strategy at BNP Paribas, anticipates that the central bank’s indication of forthcoming monetary easing measures will exert further downward pressure on the yuan, potentially testing lows around 7.3 again. As the situation unfolds, market participants closely monitor China’s monetary policy decisions and their impact on the yuan’s value amidst broader economic dynamics.
