China’s yuan hovers near 15-year low after Fed decision
In response to US Federal Reserve Chair Jerome Powell’s indication that US rates would likely rise more than anticipated, China’s yuan lingered at a level that is close to a 15-year low on Thursday, matching overall dollar strength. This dashed market hopes for a change in tone.
The Fed increased its benchmark funds rate by 75 basis points as was generally anticipated, but stated that future increases in borrowing rates are necessary to fight inflation.
The yuan’s guideline fix and spot trading were under pressure from the rising dollar.
The People’s Bank of China (PBOC) established the midpoint rate at 7.2472 per dollar before the market opened, which is the lowest rate since January 22, 2008 and 275 pip (0.28%) weaker than the previous fix of 7.2197.
The onshore yuan started out at 7.3100 per dollar on the spot market and dropped to 7.3110 before Tuesday’s close to 15-year low of 7.3280 was reached.
The spot yuan was trading at 7.3036 by lunchtime, down 146 pip or 0.2% from the previous late session finish.
According to traders, the yuan’s weakening was primarily due to the stronger dollar, but mounting indications of a slowdown in the domestic economy were exerting additional pressure on the local currency.
According to a private-sector business survey released on Thursday, China’s services activity decreased in October for the second consecutive month and at a faster rate as COVID-19 control measures hurt firms and consumption.
Barclays economists wrote in a note, “We further cut our 2023 GDP growth prediction by 70 basis points, to 3.8%.”
Yuan increases as the dollar retreats ahead of the Fed announcement.
“The downgrading is mostly due to our poorer prognosis for the property industry and weakening external demand amid a coming global recession and increased geopolitical tensions,” according to the statement.
China’s growth is expected to fall to 3.2% in 2022, much below the stated objective of approximately 5.5%, according to a new Reuters poll, making it one of the poorest performances in over 50 years.
Separately, several market participants stated they would turn their focus to the US jobs data due on Friday for additional hints on the pace of the Fed’s tightening.
By lunchtime, the offshore yuan was trading at 7.3225 per dollar, while the global dollar index increased to 111.925 from its previous closing of 111.345.