The yuan strengthened on Monday as investors bet on imminent U.S. rate cuts, but analysts caution that weak Chinese economic data could limit the currency’s gains.
Bollywood Fever: The yuan strengthened on Monday alongside other Asian currencies as investors speculated that U.S. rate cuts could begin within a month, signaling a potential end to the dollar’s prolonged rally. The yuan climbed as high as 7.1437 per dollar during morning trade and was last reported about 0.2% firmer at 7.1444.
After being pinned to the lower end of its daily trading band for months due to China’s bleak economic outlook, the yuan has recently rebounded to the middle of the range, largely driven by a weakening dollar. A massive shakeout of short bets against the Japanese yen has also contributed to the dollar’s decline.
However, despite the yuan’s recent recovery, a series of disappointing economic indicators from China, including the slowest loan growth in 15 years and continued declines in home prices, has led analysts to believe that the yuan’s upward momentum may be short-lived.
“The weak prospects for the Chinese economy and expectations for additional monetary policy easing will undermine investor confidence in Chinese assets and, in turn, reduce demand for the yuan,” analysts at the Commonwealth Bank of Australia warned. They also noted that the yuan “is unlikely to benefit much from a decline in the USD driven by an improving global economy.”
Against a basket of its trading partners’ currencies, the yuan fell to 98.07, its lowest level since January 15, according to Reuters calculations based on official data. Offshore, the yuan was about 0.2% firmer at 7.1463 per dollar at 0330 GMT.
Global markets are currently in a holding pattern ahead of Federal Reserve Chair Jerome Powell’s upcoming speech at Jackson Hole on Friday, where he is expected to argue for interest rate cuts. This event is being closely watched by investors for further signals on the future direction of U.S. monetary policy.
In the bond market, Chinese government 10-year bond yields fell 0.6 basis points to 2.18%, while the yield on comparable U.S. government debt was at 3.9%. The onshore yuan 7-day benchmark repo rate stood at 1.74%, and in the forwards market, the three-month yuan was quoted at 7.0739, 736 pips stronger than the spot rate. Three-month CNH forwards were quoted at 7.0744 per dollar.
The People’s Bank of China set the midpoint rate, around which the yuan is allowed to trade within a 2% band, at 7.1415 per dollar on Monday, 133 pips firmer than estimate. This adjustment indicates the central bank’s attempt to stabilize the currency amid ongoing economic uncertainties.
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