Updated December 22nd, 2023 at 10:26 IST
Yuan slips amid expectations of further easing after deposit rate cut
In the spot market, the onshore yuan opened at 7.1420 per dollar, witnessing a softer trend compared to other non-dollar currencies.
China's yuan faced a decline against the dollar on Friday, on hopes of widening yield differentials between the world's two largest economies. Major Chinese commercial banks recently announced deposit rate cuts, leading market observers to interpret the move as a prelude to additional reductions in policy rates aimed at supporting the economy.
The Big Five banks in China conveyed their decision to lower interest rates on select deposits, prompting expectations of a subsequent move by the People's Bank of China (PBOC) to cut policy lending rates in January 2024. Ting Lu, Chief China Economist at Nomura, emphasized the impact of enduring disinflationary pressures and a notable shift in US rates, indicating a lowered threshold for the PBOC to implement rate cuts.
While China has maintained a leaning toward looser monetary policies to bolster its slowing economy, the tightening measures in the United States have limited the country's easing efforts. Concerns about potential capital outflows and downward pressure on the yuan arise with expectations of widening yield differentials between China and the US.
Despite the Federal Reserve signalling a potential end to tightening measures, analysts and traders believe that the impact of further monetary easing in China on the yuan would be constrained. Signs of deflationary pressure in China suggest a need for additional policy easing to prevent the economy from sliding further into a deflationary scenario.
Lin Li, Head of Global Markets Research for Asia at MUFG, anticipates policy rate reductions in 2024 to mitigate deflationary risks, aiming to lower mortgage rates and alleviate financing burdens for companies. The central bank, in its recent guidance, set the midpoint rate at levels stronger than projections, indicating an official effort to stabilize the yuan.
In the spot market, the onshore yuan opened at 7.1420 per dollar, witnessing a softer trend compared to other non-dollar currencies due to adjustments in deposit rates. Trading activities remained sluggish ahead of the year-end holidays, with traders also awaiting US inflation data for further insights into the monetary trajectory of the largest global economy.
By midday, the global dollar index declined to 101.827, while the offshore yuan was trading at 7.1584 per dollar. The market remains attuned to developments in both monetary policies and economic indicators, shaping the trajectory of the yuan in the near term.
(With Reuters inputs)
Published December 22nd, 2023 at 09:44 IST