What’s going on here?
China’s yuan plunged to its lowest level in nearly seven months against the US dollar, as investors returned from their long weekend to a stronger dollar driven by high US Treasury yields and robust US jobs data.
What does this mean?
China’s major state-owned banks quickly intervened to sell dollars and buy yuan, aiming to stabilize the local currency and curb its losses. The People’s Bank of China (PBOC) set the midpoint rate at 7.1135 per dollar, a modest decline from the previous 7.1106, marking its weakest point since January 19, 2024. The onshore yuan started the day at 7.2502 per dollar and further depreciated to 7.2531, its lowest since November 2023, trading at 7.2529 by midday. Analysts from China International Capital Corporation believe the yuan will weaken against the dollar until the Federal Reserve cuts rates, but it may show stability against other currencies.
Why should I care?
For markets: The balancing act.
China’s efforts to maintain a stable yuan amidst a rising dollar highlight the balancing act central banks perform to navigate global and domestic economic pressures. The yuan’s ongoing depreciation against the dollar, contrasted with its gain against other currencies, underscores the complex dynamics at play. Investor sentiment, influenced by credit lending data and economic health indicators, will be key in the coming months. The CFETS index, reflecting the yuan’s value against major trading partners, hitting its highest level since May 14 despite the yuan’s losses against the dollar, underscores this intricate landscape.
The bigger picture: Strategic economic policies in play.
As China navigates the currency fluctuations, traders are closely watching May’s credit lending data to gauge economic health. A Reuters poll indicates a potential rebound in new yuan loans from April, following the central bank’s directive to ramp up lending. These moves highlight Beijing’s policy focus on maintaining economic stability and growth amid external pressures. The offshore yuan’s weakening trend, trading at 7.2669 per dollar, mirrors the onshore struggles, indicating coordinated challenges and policy responses.
