Sun, January 29, 2023

The Yuan Weakening as The Dollar Rises After the Fed Minutes

The Yuan Weakening As The Dollar Rises After The Fed Minutes

On Thursday, the Chinese yuan fell as minutes from the US Federal Reserve’s March meeting revealed overwhelming support for big rate rises; supporting the greenback.

The minutes of the meeting boosted the US dollar index to 99.778 overnight, its highest level since May 2020. The most recent reading was 99.572. The People’s Bank of China fixed the yuan’s midpoint rate slightly higher than expected before the market opened, at 6.3659 per dollar, its highest level since April 1. The spot yuan began the day at 6.3592 per dollar, firming somewhat in early trade before weakening. Traders said corporate foreign exchange sales helped, but overall activity remained low due to the extended lockdown in Shanghai, China’s financial center.

Ongoing COVID Restrictions

Resentment rose over the 11th day of COVID-19 limits; hence, Shanghai claimed it was doing everything to enhance the flow of food and necessary items to locked-in citizens.

The yuan traded at 6.3621 per dollar at lunchtime, down 33 pips from Wednesday’s late session finish. The offshore yuan (CNH=D3) also fell to 6.3675 per dollar from 6.3595 at the closing. Spot yuan remained stable, according to a trader at a Chinese bank. At the same time, swaps should be under pressure due to decreasing China-US spreads. The disparity between the benchmark Chinese and US 10-year government bond rates (US10CN10=RR) was 20 basis points on Thursday; this came after it narrowed to 8 basis points the day before.

On Thursday, a former foreign exchange regulator wrote in the official Shanghai Securities News that the yield differential between the US and Chinese bonds should contract even further, or perhaps reverse. “The divergence in monetary policy between the United States and China will tighten the China-US spread even further, slowing foreign capital inflows and possibly leading to capital outflows,” said the chief economist at BOC International official at the State Administration of Foreign Exchange (SAFE).

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