China's yuan slips on economic weakness despite tight offshore funding
SHANGHAI, July 16 (Reuters) -The yuan eased against the U.S. dollar on Tuesday as a slew of weak Chinese economic data dampened sentiment, but offshore funding conditions remained tight, preventing the currency from sliding further.
The world's second-largest economy grew much slower than expected in the second quarter as a protracted property downturn and worries over jobs knocked the wind out of a fragile recovery, keeping alive expectations Beijing will need to unleash even more stimulus.
"The currency will remain the primary release valve to help ease domestic conditions, with the authorities unwilling to use the interest rate lever," said analysts at Citi.
"Having been tactically short the dollar against the offshore yuan over the past 2 weeks, we have now flipped long, targeting a slow burn move to 7.35 per dollar over the coming two months," said Citi analysts in a note to investors.
Meanwhile, funding conditions remained tight offshore, making it hard for investors to short the yuan. The offshore yuan overnight HIBOR HICNHONDF= rose to 5.23242% on Tuesday, highest since April 19, 2024.
Spot yuan CNY=CFXS opened at 7.2619 per dollar. As of 0301 GMT it was trading 25 pips lower than the previous late session close at 7.2652 and 1.86% weaker than the central bank's daily midpoint.
The yuan has lost 2.2% against the dollar this year. It has been under pressure since early 2023 as the property crisis, anaemic consumption and falling yields drive capital flows out of China, and foreign investors stay away from its struggling stock market.
China's faltering growth momentum evident in Monday's second quarter and June data argue for additional support measures and further depreciation of the renminbi, said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.
Investors are watching closely for any policy announcements during the Third Plenum, a top leadership gathering during July 15-18, though it is expected to focus more on longer-term economic and social issues.
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 7.1328 per dollar, 1,343 pips firmer than a Reuters' estimate.
The gradual but steady weakening trend in the yuan midpoint guidance rate in the past two months suggests that the PBOC is becoming more accommodative of yuan depreciation, Tan said.
The official guidance rate has weakened around 300 pips since mid-May.
Key onshore vs offshore levels:
* Overnight dollar/yuan swap onshore -8.00 pips vs. offshore -8.00
* Three-month SHIBOR SHIBOR= 1.9 % vs. 3-month CNH HIBOR 3.1 %
LEVELS AT 0301 GMT
INSTRUMENT | CURRENT vs USD | UP/DOWN(-) VS. PREVIOUS CLOSE % | % CHANGE YR-TO-DATE | DAY'S HIGH | DAY'S LOW |
Spot yuan <CNY=CFXS | 7.2652 | -0.07 | -2.25 | 7.2619 | 7.2688 |
Offshore yuan spot CNH=D3 | 7.277 | -0.03 | -2.09 | 7.274 | 7.2784 |
Reporting by Shanghai Newsroom; Editing by Kim Coghill
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