TRADERS are bracing for more pushback from China’s central bank as the yuan approaches the lowest level in 14 years.
The onshore yuan has lost about 4% over the past month, trading within 1% of 7.2 per dollar, a level it hasn’t reached since 2008. The People’s Bank of China (PBOC) has already stepped up its currency defence, but it did little to stop the depreciation.
Breaking the psychologically important level may prompt officials to take more measures to slow the depreciation in an attempt to discourage capital flight and keep financial markets stable. Possible counter-attacks include delivering stronger yuan fixes, adding more onshore dollar supplies and squeezing offshore yuan funding to make it more expensive to short the currency, analysts say.
“Authorities are obviously concerned,” said Patrick Bennett, a Hong Kong-based strategist at the Canadian Imperial Bank of Commerce. “That makes the task of supporting the domestic economy more difficult,” he said, adding that a move through 7.2 per dollar would put 7.3 in immediate focus.
Morgan Stanley expects the yuan to weaken to 7.30 per dollar by year-end. “Yuan’s sensitivity to the dollar is higher now given bond outflows and exporters’ lower FX conversion ratio,” strategists including Min Dai wrote in a note on Monday (Sep 26).
Betting against the yuan has been a winning strategy this year as the currency fell 11 per cent. It’s on pace for the biggest annual decline since 1994, when China unified its currency market, resulting in an over 30 per cent devaluation of its official exchange rate. The more recent decline reflects policy divergence between China and the US. The PBOC has been easing rates to shore up an economy battered by Covid restrictions and a housing slowdown, while the Federal Reserve is raising rates to cool inflation.
