Forex

Yuan weakens after central bank cuts interest rates, reserve levels

Reuters Shanghai | Updated on January 23, 2018

yuan

China’s yuan fell against the dollar on Wednesday after the central bank cut the one-year benchmark bank lending rate by 25 basis points and reserve requirements by 50 basis points for most big banks.

After the aggressive monetary easing, the central bank seemed to intervene little to prop up the yuan on Wednesday, permitting the currency to depreciate slightly, traders said.

“The central bank set its midpoint weaker than 6.4 following the offshore market reaction to the easing signals that the yuan is more market-oriented now,’’ said a trader at a Chinese commercial bank in Beijing. “But less intervention has given rise to concerns on the yuan’s continuing depreciation.’’

However, Premier Li Keqiang was quoted by state television on Tuesday as saying that there is no basis for continued depreciation of the yuan.

The People’s Bank of China set the midpoint rate at 6.4043 per dollar prior to market open, 0.09 per cent weaker than the previous fix of 6.3987 and the official guidance rate’s weakest level in four years.

The spot market opened at 6.4181 per dollar and was changing hands at 6.4190 at midday, down 0.1 per cent from the previous close. The offshore yuan was trading 1.14 per cent lower than the onshore spot at 6.493 per dollar.

Offshore one-year non-deliverable forwards contracts, considered the best available proxy for forward-looking market expectations of the yuan’s value, traded at 6.7325 or 4.87 per cent weaker than Wednesday’s midpoint.

Economists at OCBC in Singapore, had in a note on Tuesday’s PBOC moves, said: “It not the first time for China to roll out jumbo easing, however it is the first time for China to ease aggressively when the consensus view is shifting towards RMB depreciation. Therefore, we see a good chance that RMB may weaken further in both onshore and offshore market.’’

“This suggests that China's policymakers may have higher tolerance for RMB weakness. Nevertheless, given China’s strong trade surplus, we see no basis for RMB to weaken significantly. Our call for a 6.30-6.50 range for USDCNY remains unchanged.’’

Published on August 26, 2015

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