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Analysis-As yuan skids, markets bet more depreciation is in store

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By Rae Wee and Vidya Ranganathan

SINGAPORE (Reuters) – is sliding and market participants suspect authorities are deliberately but slowly engineering a light depreciation of the currency, both to complement an easy monetary policy and to support exports.

Several signals have stirred that speculation. While the yuan has declined roughly 2% this year against the dollar, it has become relatively less competitive as Japan’s yen and currencies of other neighbours South Korea, Thailand and Taiwan drop more sharply.

The People’s Bank of China (PBOC) also appears to have loosened its grip on the yuan, allowing it to fall to the weak side of the 7.2-per-dollar level that state-owned banks had staunchly defended in the past, though it has continued to lend some support through stronger-than-expected settings of the daily mid-point for the currency.

Last Friday, traders took the absence of state banks in the market to push the yuan to 7.23 to a dollar initially, and even though state banks eventually stepped in the yuan saw its biggest daily drop in nearly 3 months.

Analysts at National Australia Bank (OTC:) (NAB) said it was “more than coincidental” that the PBOC’s defence of the yuan had relaxed in the same week the Bank of Japan abandoned its negative rates and yield-curve control policy.

Though the BOJ’s policy shift last week was momentous, Japanese yields are still barely positive and the yen has ironically weakened further. It is down 7% this year against the dollar this year alone, and at a 30-year low against the yuan.

“Concerns at loss of export competitiveness vis-à-vis Japan too have motivated Friday’s decision to lift the 7.20 cap,” NAB analysts Ray Attrill and Rodrigo Catril wrote this week.

The yuan’s trade-weighted index is up 2% so far this year as currencies of China’s trading partners have weakened, gnawing away at the country’s export competitiveness and hobbling its uneven economy recovery.

The index is at 99.30, far above the 92-98 band that analysts think the PBOC is comfortable with.

The PBOC did not respond to a Reuters request for comments.


Even though China’s exports seem to have rebounded early this year, the manufacturing sector is struggling, and weak export orders suggest the sector needs more support. A weak yuan would help lift export earnings.

Analysts at Oxford Economics expect the monetary policy divergence between the U.S. Federal Reserve and PBOC to keep the yuan weak in the first half of 2024, but wrote that “any depreciation ahead is likely to be highly controlled”, and projected the yuan will not fall beyond 7.34, a level last seen in September.

UBS strategists Rohit Arora and Teck Quan Koh also reckon there could be a shift in Beijing’s policy priorities, similar to the yuan’s decline in the second half of 2022, when it gradually fell nearly 9% to as far as 7.328.

“Put another way, we don’t expect authorities to allow yuan to be fully market-driven, but continue with a managed and orderly adjustment process,” they said.

Barring another big boost for the U.S. dollar, they expect the yuan will head slowly for 7.4.

Indeed, the steady outflows from frail mainland stock markets and other speculative bets might require the PBOC to dampen volatility, as it does normally through state banks.

One such pressure point is the yuan’s increasing use in ‘carry trades’ in which investors borrow in a currency with low interest rates and invest the proceeds in a higher-yielding currency.

Returns on yuan-funded carry trades are lower than that on yen-funded ones, where an easy 5% annualised gain can be made on 3-month swaps. But traders expect the yen to be more volatile under the BOJ’s new policy regime, while the yuan has traditionally been sheltered.

“From where I sit, the only thing preventing the yuan from meaningfully weakening is active policy guidance from PBOC,” said Rong Ren Goh, a portfolio manager in the fixed income team at Eastspring Investments.

© Reuters. A China yuan note is seen in this illustration photo May 31, 2017.     REUTERS/Thomas White/Illustration/File Photo

Goh has been using the as a funding currency since the beginning of the year, shorting the currency and investing in high-yielding assets such as Indian rupee bonds.

“If you’ve held a long dollar-CNH position since the beginning of the year, you would have already earned more than 400 pips of carry and capital gains,” Goh said.


Dollar flat ahead of key inflation release; Middle East tensions ease

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on – The U.S. dollar traded largely unchanged in calm trading Monday, amid a calming of tensions in the Middle East and ahead of the release of the Federal Reserve’s favorite gauge of inflation later in the week.

At 05:40 ET (09:40 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded flat at 106.005, retreating from the five-month peak of 106.51 seen last week. 

Dollar stable ahead of key inflation release

The dollar surged to new highs last week after Israel launched a missile attack on Iran, in an escalation of the conflict in the volatile Middle East.

However, tensions appear to have been cooled, with Tehran downplaying Israel’s retaliatory drone strike against Iran, in what appeared to be a move aimed at averting a regional war.

“Sentiment is generally supported across asset classes as the week starts,” said analysts at ING, in a note. “All interested parties appear to have chosen the path of downplaying the size and consequences of Friday’s Israeli strikes in Iran.”

That said, the dollar has also been supported by strong U.S. economic data and persistent inflation, coupled with a slew of hawkish comments from Fed officials, reducing the chances of the Federal Reserve cutting rates any time soon. 

These officials will be keeping quiet this week, ahead of next week’s , but activity is likely to be limited ahead of Friday’s look at the , the Federal Reserve’s favored inflation gauge, which economists expect to remain elevated in March.

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Other economic data for the week includes an initial estimate of first quarter , which is expected to have moderated slightly from the previous quarter. Data on and will also be released along with revised figures on consumer sentiment and inflation expectations.

Euro edges up, but ECB set to cut early

In Europe, rose 0.1% to 1.0656, trading near six-month lows with regional economic weakness set to result in the European Central Bank cutting interest rates before the Federal Reserve.

Elevated tensions in the Middle East are unlikely to drive up energy prices and should not affect the European Central Bank’s plans to start cutting interest rates in June, French central bank chief Francois Villeroy de Galhau said on Sunday.

“Barring surprises, there is no need to wait much longer”, Villeroy told business daily Les Echos in an interview. “At the moment, the conflict is not leading to a marked rise in oil prices. If this were ever the case, we would have to analyse monetary policy for whether this shock is temporary and limited, or whether it is transmitted – beyond commodities – to underlying inflation.”

climbed 0.1% lower to 1.2355, just above its lowest level since mid-November seen on Friday, after Bank of England Governor Andrew Bailey and Deputy Governor Dave Ramsden alluded last week to Britain’s inflation slowing as expected. 

“Sterling markets moved on Friday after the Bank of England’s deputy governor, Dave Ramsden, sounded less concerned about price pressures and suggested that there were indications of UK inflation converging to that of the eurozone,” ING said. “Crucially, he added that the Bank will be “responsive” as evidence on inflation accumulates.”

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Yen weak ahead of BOJ meeting

In Asia, traded 0.1% higher at 154.74, remaining well above the 154 level and near 34-year highs, keeping investors on guard over any potential government intervention. 

Focus this week is on a Bank of Japan rate decision on Friday – the central bank’s first meeting after a historic rate hike in March. Any cues on future rate hikes and policy changes will be closely watched.

edged 0.1% higher to 7.2437, after the People’s Bank of China kept its benchmark on hold, as expected. 

The LPR was kept at record lows, as the PBOC moved to keep monetary policy as loose as possible to buoy economic growth. However, low interest rates are also expected to keep the yuan under pressure. 

The USDCNY pair was close to a five-month high, above the psychologically important 7.2 level. 


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UBS raises USDCNY forecast amid geopolitical tensions

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On Monday, UBS revised its forecast for the exchange rate, citing increasing geopolitical tensions and expectations of fewer rate cuts by the Federal Reserve. The Swiss financial services firm now anticipates the USD/CNY rate to reach 7.35 by June, up from the previous target of 7.20. Similarly, the September target has been adjusted to 7.30 from 7.15, the December target to 7.25 from 7.15, and the March 2025 target to 7.20 from 7.15.

UBS suggests that the People’s Bank of China (PBoC) is showing a greater willingness to allow a weaker yuan, which could contribute to additional short-term pressure on the Chinese currency. The firm’s analysis points to the rising geopolitical tensions as a key factor influencing the yuan’s trajectory.

Despite the potential for a pivot by the Federal Reserve in September, which might typically ease the upward trend of the USD/CNY, UBS believes that the impact could be mitigated. The firm notes that market concerns about US-China trade tensions, especially in the lead-up to the US presidential election in November, could dampen the effects of any policy changes by the Fed.

UBS’s revised targets reflect a cautious outlook on the Chinese yuan, as the global financial market continues to weigh various geopolitical and economic factors. The firm’s adjustment of the USD/CNY targets highlights the complex interplay between central bank policies, international relations, and market sentiment.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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Asia FX weak as rate fears keep dollar steady

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on– Most Asian currencies moved in a flat-to-low range on Monday, and were nursing steep losses from the past week as concerns over higher-for-longer interest rates kept traders largely biased towards the dollar.

Still, easing fears over a bigger conflict in the Middle East offered regional currencies some relief, as risk appetite improved. 

But most regional units still retained a bulk of their losses from over the past week, as traders steadily priced out expectations that the Federal Reserve will cut interest rates by as soon as June.

Dollar steady, more rate cues awaited this week 

The and both fell slightly in Asian trade on Monday, but remained close to over five-month highs hit earlier in April. 

Waning bets on a June rate cut boosted the dollar, especially after strong U.S. inflation readings and hawkish commentary from top Fed officials. 

Focus this week is on more cues on U.S. monetary policy, specifically from data- which is the Fed’s preferred inflation gauge. The reading is due on Friday and is expected to reiterate that U.S. inflation remained sticky in March.

More cues on the U.S. economy are also due this week, with data for April set to offer more insight into business activity.

Chinese yuan steady after PBOC holds loan prime rate 

The Chinese yuan’s pair moved little on Monday after the People’s Bank of China kept its benchmark on hold, as expected. 

The LPR was kept at record lows, as the PBOC moved to keep monetary policy as loose as possible to buoy economic growth. The central bank is also expected to further trim the rate this year, after a cut to the in February. 

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But low interest rates are also expected to keep the yuan under pressure. The USDCNY pair was close to a five-month high, above the psychologically important 7.2 level. 

Japanese yen flat, BOJ meeting awaited 

The Japanese yen’s pair moved little on Monday, but remained well above the 154 level amid little relief from the dollar.

This kept investors on guard over any potential government intervention, especially as the USDJPY pair tested 34-year highs at 155. 

Focus this week is on a on Friday- the central bank’s first meeting after a historic rate hike in March. Any cues on future rate hikes and policy changes will be closely watched.

Broader Asian currencies moved little as fears of higher-for-longer U.S. rates remained in play. 

The Australian dollar’s pair rose 0.3% after tumbling to a five-month low last week.

The South Korean won’s pair rose 0.5%, while the Singapore dollar’s pair was flat.

The Indian rupee’s pair rose 0.1%, but was trading below record highs hit last week.

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