China’s yuan eases to 7-week low as US rates seen higher for longer

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Hong Kong: China’s yuan weakened to a seven-week low on Wednesday, weighed down by a buoyant dollar after an unexpected rebound in US business activities fuelled expectations that the Federal Reserve will keep interest rates higher for longer.

With an absence of Chinese policy updates and economic data this week, the yuan’s movement has been largely driven by the US dollar, analysts said. Its fall on Tuesday was in line with other Asian currencies.

The offshore yuan weakened past 6.9 in the morning trading session, to its weakest level since Jan. 4.

China’s yuan eases on worries over geopolitical tensions

Onshore, spot yuan opened at 6.8792 per dollar and was changing hands at 6.8930 at midday, 60 pips weaker than the previous late session close and 0.25% away from the midpoint.

The onshore yuan has dropped 2 % thus far this month, almost wiping out the entire 2.2% gain for the month of January when it rose on the initial excitement caused by China reopening its borders.

The People’s Bank of China set the midpoint rate at 6.8759 per US dollar prior to the market open, weaker than the previous fix of 6.8557. The spot rate is allowed to trade with a range 2% above or below the official fixing on any given day.

The offshore yuan was trading 0.06% weaker than the onshore spot at 6.8973 per dollar.

The one-year forward value for the offshore yuan traded at 6.7301 per dollar, indicating a roughly 2.48% appreciation within 12 months.

The global dollar index fell to 104.083 from the previous close of 104.176, but the greenback was underpinned by a surprise rebound in US business activity.

US business activity as measured by the S&P Global Flash Composite PMI Output Index rebounded in February to 50.2, ending seven straight months of lingering below the 50 mark, which indicates a contraction in the private sector.

“Better than expected preliminary services purchasing managers’ index out of the U.K. (and) US suggests that these economies could still withstand more rate hikes,” said Christopher Wong, a FX strategist at OCBC Bank.

Fed funds futures traders are now pricing for the Fed’s benchmark overnight interest rate to reach 5.36% in July and end the year at 5.18%.

The sticky interest rate hike trends in the US, and elsewhere including Australia and Europe, will continue to exert downward pressure on Asian ex-Japan currencies including the yuan, Wong said.

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