Yuan hits 1-1/2-year low as zero-COVID policy rattles investors

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SHANGHAI — China’s yuan weakened sharply

against a strengthening dollar on Friday, touching a 1-1/2-year

low as Beijing’s pledge to double down its zero-COVID policy hit

market sentiment.

Both the onshore spot yuan and its offshore

counterpart slipped to their weakest levels against the

dollar since Nov. 4, 2020.

Those sharp declines came despite stronger-than-expected

central bank guidance for the yuan.

Prior to market opening, the People’s Bank of China (PBOC)

set its midpoint guidance at a 1-1/2-year low of

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6.6332 per dollar, 660 pips or 1% weaker than the previous fix,

but 70 pips firmer than Reuters’ estimate for the fixing.

The slightly stronger-than-expected midpoint, usually

interpreted by markets as the official stance on foreign

exchange policy, failed to stem the rapid losses in the yuan on

Friday.

The onshore yuan weakened to a low of 6.6982 per dollar at

one point in early trade, not far from the psychologically

important 6.7 per dollar, with some market participants saying a

breach of that threshold could prompt further losses.

By midday, the onshore spot traded at 6.6743 per dollar, 208

pips softer than the previous late session close while its

offshore counterpart eased to 6.7107.

Xing Zhaopeng, senior China strategist at ANZ, said broad

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dollar strength in light of the Federal Reserve’s hawkish stance

added pressure to the Chinese currency.

“Currently, the yuan is bearing the most depreciation

pressure, and such stress may ease in the third quarter of this

year,” Xing said, expecting the yuan to trade in a range of 6.6

to 6.8 by end-June.

Xing and several currency traders noted companies will soon

start making dividend payments to overseas shareholders, and

such dollar demand could weigh further on the yuan.

“However, we should not discount the supportive factors for

the yuan … policymakers would use policy tools to guide the

market, which has been somewhat decoupled from the

fundamentals,” said Marco Sun, chief financial market analyst at

MUFG Bank.

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“If the exchange rate loses its two-way volatility, window

guidance may follow,” Sun added, expecting the yuan to trade in

a range of 6.50 to 6.65 in the second quarter.

“Window guidance” refers to requests by regulators to market

participants not to aggressively make one-way bets on the

currency, which has taken place in the past when the yuan

declined heavily.

Separately, Beijing’s pledge to fight any comments and

actions that distort, doubt or deny the country’s COVID-19

response policy also dented market sentiment, traders said.

The reaffirmation of the zero-COVID policy also roiled stock

markets, with major stock indexes plunging in morning trade. The

blue chip CSI 300 index fell about 2.6% on Friday

morning, heading for its worst session since April 25.

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“The economy was barely mentioned at the meeting, suggesting

Beijing may have become more determined to maintain the

zero-COVID strategy,” said Lu Ting, chief China economist at

Nomura.

Lockdowns in dozens of cities across the country during the

latest wave of COVID infection, stringent prevention pressures

and mobility restrictions have prompted heightened investor

concern over wider disruption to economic activity.

The yuan market at 0401 GMT:

ONSHORE SPOT:

Item Current Previous Change

PBOC midpoint 6.6332 6.5672 -0.99%

Spot yuan 6.6743 6.6535 -0.31%

Divergence from 0.62%

midpoint*

Spot change YTD -4.78%

Spot change since 2005 24.01%

revaluation

Key indexes:

Item Current Previous Change

Thomson 101.35 101.8 -0.4

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Reuters/HKEX

CNH index

Dollar index 103.608 103.752 -0.1

*Divergence of the dollar/yuan exchange rate. Negative number

indicates that spot yuan is trading stronger than the midpoint.

The People’s Bank of China (PBOC) allows the exchange rate to

rise or fall 2 percent from official midpoint rate it sets each

morning.

OFFSHORE CNH MARKET

Instrument Current Difference

from onshore

Offshore spot yuan 6.7107 -0.54%

*

Offshore 6.7736 -2.07%

non-deliverable

forwards

**

*Premium for offshore spot over onshore

**Figure reflects difference from PBOC’s official midpoint,

since non-deliverable forwards are settled against the midpoint.

.

(Reporting by Winni Zhou and Andrew Galbraith; Editing by

Jacqueline Wong, Lincoln Feast and Sam Holmes.)