Chinese yuan slips to weakest level in two years as hawkish Fed signals interest rate hike

Chinese yuan slips to weakest level in two years as hawkish Fed signals interest rate hike

Hong Kong
CNN Business

The Chinese Yuan fell to its lowest level in two years after the hawkish comments of Federal Reserve Chairman Jerome Powell which sent the dollar higher recently.

The yuan – also known as the renminbi It lost about 0.5% against the dollar on Monday in foreign trade outside mainland China. It was trading at 6.9277, the lowest level since August 2020.

The yuan also weakened significantly in internal trading, down 0.6% from the previous session.

Risky assets fell globally after Powell indicated that the US central bank will fight inflation with more historical interest rate hikes. His comments weighed on investors, who grappled with what sharp interest rate increases might mean for the health of the economy.

“Broad strength of the US dollar is likely to remain underpinned by the Fed’s hawkish messaging and growth divergence in favor of the US dollar,” Citi analysts said in a note to clients on Monday, adding that this would continue to pressure Asian currencies.

They added that the yuan’s recent weakness was also driven by “worse-than-expected economic data and interest rate cuts.”

Shares were also sold on Monday. Japan’s Nikkei 225 (N225) shed 2.7%, Korea’s Kospi shed 2.1%, and Hong Kong’s Hang Seng (HSI) lost 0.8%. China’s Shanghai Composite was down 0.1%.

The yuan has accelerated its decline against the US dollar this year, as China’s economic outlook has softened and monetary policies in the US and China increasingly diverged. While the Federal Reserve declared war on inflation and continued to raise interest rates, the Chinese authorities made fighting the recession a priority and cut interest rates sharply.

Earlier this month, the People’s Bank of China unexpectedly cut interest rates, after new data showed the economy losing steam last month due to renewed Covid lockdowns and a deepening real estate slowdown.

Analysts are also concerned about the impact of a record-breaking heat wave and drought in China on growth. Already, several international companies, including Tesla (TSLA) and Toyota (TM), have faced factory disruption due to power outages.

The offshore yuan is down 3% against the US dollar this month and is down 9.4% since March.

Citi analysts said the yuan’s decline since March has been driven by a bullish yuan decoupling and large capital outflows as traders worried growth would be hit by zero-Covid restrictions.

There is another motive on the part of the government, as the Chinese authorities have been tolerating a “gradual” weakening of the yuan, which could benefit exporters by making the prices of their goods more competitive.

“While this is unlikely to prompt the authorities to pursue active currency weakness, it is likely to allow market forces driving the renminbi to weaken or underperform,” they said.

Citi analysts expected the yuan to eventually reach 6.95 against the US dollar.

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