Yuan edges up as PBOC holds medium rate steady, but RRR cut still expected

Article content

SHANGHAI — The yuan edged up against a

strengthening dollar on Friday after the Chinese central bank

left a key policy rate unchanged, despite the State Council

calling for more monetary stimulus to cushion a sharp economic

slowdown.

The People’s Bank of China (PBOC) kept borrowing costs of

its medium-term policy loans (MLF) steady, as most market

watchers had expected.

While markets still expect a cut in banks’ reserve

requirement ratios (RRR) as early as Friday, some traders and

Article content

analysts said the MLF decision reaffirmed views that Beijing

will be cautious about announcing fresh easing measures at a

time when the U.S. Federal Reserve is preparing to start raising

interest rates aggressively this year.

“The issue is particularly concerning as the Federal Reserve

is starting to hike rates and Chinese assets are also perceived

as riskier in the current economic downturn,” Alicia Garcia

Herrero, chief economist for Asia Pacific at Natixis, said in a

note this week.

“This could put strong depreciation pressure on the RMB,”

she said, noting the PBOC may only take small steps to avoid an

increase in capital outflows.

Prior to the market opening, the PBOC set the midpoint rate

at a near four-month low of 6.3896 per dollar, 356

Article content

pips or 0.56% weaker than the previous fix of 6.354.

In the spot market, onshore yuan opened at 6.3756

per dollar and was changing hands at 6.3709 at midday, 79 pips

firmer than the previous late session close.

“Cutting both interest rates and reserve requirement ratio

(RRR) would certainly bring downside pressure to the currency

now,” said a trader at a Chinese bank.

The yield premium between China’s 10-year government bonds

and their U.S. counterparts vanished

earlier this week, and fast rising U.S. yields continued to

pressure the yuan forwards.

The benchmark 1-year dollar/yuan swap points

touched a low of 590 points on Friday morning, the lowest level

since May 2020.

New York Fed President John Williams said on Thursday that a

Article content

half-point rate rise next month was “a very reasonable option,”

in a further sign that even more cautious policymakers are on

board with faster monetary tightening in the United States.

Separately, traders said markets would pay close attention

to China’s Q1 GDP and March activity data due on Monday to gauge

the early impact from a spate of COVID-19 induced lockdowns in

many parts of the country.

A Reuters poll showed that China’s economic growth is likely

to slow to 5.0% in 2022 amid renewed virus outbreaks and a

weakening global recovery, raising pressure on the central bank

to ease policy further. The government has set a growth target

of around 5.5% for this year.

By midday, the global dollar index rose to 100.547

Article content

from the previous close of 100.321, when the offshore yuan

was trading at 6.3825 per dollar.

The yuan market at 0401 GMT:

ONSHORE SPOT:

Item Current Previous Change

PBOC midpoint 6.3896 6.354 -0.56%

Spot yuan 6.3709 6.3788 0.12%

Divergence from -0.29%

midpoint*

Spot change YTD -0.25%

Spot change since 2005 29.91%

revaluation

Key indexes:

Item Current Previous Change

Thomson 104.84 104.75 0.1

Reuters/HKEX

CNH index

Dollar index 100.547 100.321 0.2

*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 6.3825 -0.18%

*

Offshore 6.4615 -1.11%

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 Kim

Coghill)