Yuan loiters at 13-month low, breaks threshold after Fed's hawkish stance

Reuters

Yuan loiters at 13-month low, breaks threshold after Fed's hawkish stance

Dec 19, 2024 at 4:47 am GMT

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Yuan hits 13-month low despite PBOC support

Dollar strengthens after Fed's hawkish rate stance

PBOC sets firmer midpoint to slow yuan depreciation

Hong Kong, Dec 19 (Reuters) -China's yuan hovered at a 13-month low and breached a threshold despite strong central bank support, as the dollar's strength remained unwavering after the Federal Reserve turned hawkish on its rate outlook for next year.

By 0342 GMT, the yuan CNY=CFXS was 0.2% lower at 7.2992 to the dollar, 144 pips lower than the previous late session close.

It hit a trough of 7.3001 in morning deals and weakened past the psychologically important 7.3 per dollar level, its weakest since November 2023 and near where it has recently struck successive new lows.

The offshore yuan traded at 7.3095 yuan per dollar CNH=D3 around midday after hitting a 13-month low of 7.3260.

The Chinese currency has fallen for seven straight days as capital continued to flow into the higher-yielding dollar.

The U.S. central bank cut interest rates on Wednesday, as expected, but Federal Reserve Chair Jerome Powell said more reductions in borrowing costs now hinge on further progress in lowering stubbornly high inflation.

The hawkish tilt from Powell and his team sent traders heavily dialling back on easing expectations next year and in turn sparked a broad dollar rally.

The dollar flirted with a two-year peak on Thursday after traders wound back easing expectations, while the benchmark U.S. 10-year notes yield held near a seven-month high.

The yuan is down 0.7% against the dollar this month, and 2.7% weaker this year. It has been under pressure since early 2023 as domestic woes around a moribund property sector, anaemic consumption and falling yields drive capital flows out of yuan.

Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate CNY=PBOC, around which the yuan is allowed to trade in a 2% band, at 7.1911 per dollar.

The fixing was 1,254 pips firmer than a Reuters' estimate CNY=RTRS of 7.3165, the widest gap since July.

The PBOC has been keeping its daily yuan official guidance on the firmer side of the 7.2 per dollar level, with analysts interpreting that the central bank is reluctant to see the yuan depreciating too fast despite the mounting downward pressure.

"The PBOC is trying to restrain the upwards move in USD/CNY by keeping the onshore reference rate under 7.20," said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.

"I think this will continue through the new year. But eventually, it will give way, particularly when it becomes clear that Trump will raise tariffs on China imports."

In addition to the official attempt from the persistently firmer-than-expected midpoint guidance, traders said liquidity conditions in the offshore markets were very tight on Thursday. The tightening measures would effectively raise the cost of shorting the yuan and rein in the weakness.

Offshore yuan tomorrow-next forwards CNHTN=, a gauge that measures the yuan conditions in the offshore markets, jumped to 11.35 points, the highest level since April.

Key onshore vs offshore levels: