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China’s yuan slips to weakest level in two years as hawkish Fed signals more rate hikes – KION546

by Laura Hay, CNN Business

The Chinese yuan fell to its lowest level in two years after Federal Reserve Chairman Jerome Powell recently prompted a rally for the greenback.

Yuan – also known as Renminbi , Offshore trade outside mainland China declined about 0.5% against the dollar on Monday. It traded at 6.9277, the lowest level since August 2020.

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

Risk assets have fallen globally after Powell indicated that the US central bank would fight inflation with more historical rate hikes. His comments weighed on investors, which could mean more aggressive interest rate hikes for the health of the economy.

“Broader US dollar strength is likely to remain supported by Fed messaging and a growth divergence in favor of the US dollar,” Citi analysts said in a note to clients on Monday. Having said that it will continue to put pressure on Asian currencies.

He said the yuan’s recent weakness was driven by “worse than expected economic data and rate cuts”.

Shares sold out on Monday as well. Japan’s Nikkei 225 lost 2.7%, Korea’s Kospi 2.1% and Hong Kong’s Hang Seng lost 0.8%. China’s Shanghai Composite fell 0.1%.

The yuan has accelerated its decline against the US dollar this year, as China’s economic outlook weakened and monetary policies in the US and China changed sharply. While the Fed has declared war on inflation and continues to raise interest rates, Chinese officials have kept fighting the recession as their priority and cut rates aggressively.

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

Analysts are also concerned about the impact of China’s record-breaking heat and drought on growth. Already, several international businesses, including Tesla and Toyota, have faced disruption in factories due to power outages.

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

Citi analysts said the yuan’s decline since March was triggered by sharp yuan positions and large capital outflows, as traders worried about growth from zero-Covid restrictions.

Another driver is from the government, as Chinese officials were “gradually” tolerant of a weaker yuan, which could benefit exporters by making the price of their goods more competitive.

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

Citi analysts forecast the yuan to trade higher towards 6.95 against the US Dollar eventually.

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