Chinese yuan approaches 7 level as PBOC slashes midpoint rate

By Ambar Warrick

Investing.com-- China’s yuan came close to breaching the key 7 to the dollar level on Monday after the People’s Bank of China slashed its daily midpoint fix for the currency, while pressure from a strong dollar and rising Treasury yields also weighed.

The PBOC set its daily yuan midpoint at 6.9572 a dollar on Monday, compared to Friday’s fix of 6.8942. Monday’s fix was also at its weakest level since late-December.

The yuan was last trading down 0.2% at 6.9677 against the dollar - its weakest level in nearly three months.

The PBOC’s weak fix comes on the heels of a hotter-than-expected U.S. inflation report, which saw the dollar surge to a seven-week high against a basket of currencies on Friday. The report also triggered a broad spike in U.S. Treasury yields.

Strong U.S. inflation is expected to give the Federal Reserve more economic headroom to keep raising interest rates. This heralds more pressure on the yuan, as the gap between Chinese and U.S. rates widens further in the dollar’s favor.

Optimism over easing U.S. inflation and a post-COVID Chinese economic recovery had helped the yuan recover from the 7 level in early-December. But that trade appears to be unwinding amid renewed fears of rising U.S. rates.

Focus this week is also on China’s purchasing managers’ index for February, which is expected to show a somewhat mixed economic recovery. While service sector activity is set to grow further, the manufacturing sector is still expected to remain in contraction, as seen in January.

This somewhat mixed recovery in China has also weighed on sentiment, given that traders were pricing in a swift economic rebound in the country after it relaxed most anti-COVID measures earlier this year.

Chinese inflation has also remained languid despite the reopening, giving the PBOC little room to hike interest rates. The bank is struggling to maintain a balance between fostering economic growth and curbing further weakness in the yuan.

Chinese lending rates are currently at historic lows, keeping the yuan’s appeal limited.