Chinese yuan breaches key 7 level as post-COVID rebound stalls

Investing.com -- China’s offshore yuan fell below the key 7 level on Wednesday, with the dollar-spot pair coming within spitting distance of the level as a string of weak economic readings cast doubts over a recovery in the country this year.

The offshore yuan fell 0.1% to 7.0030 against the dollar, breaching the level for the first time this year. The dollar-yuan spot level slid 0.2% to 6.9895, and was at its weakest level since late-December.

While the 7 level is largely arbitrary, China has acknowledged the psychological importance of the level by rolling out a slew of measures in recent years to prevent the currency from crossing the threshold. The breaching of the 7 level usually heralds more weakness for the Chinese currency.

But the recent drop in the yuan comes after a string of weak economic readings from China, such as industrial production and retail sales this week - showed that an economic recovery in the country was slowing after an initial bounce in the first quarter.

The People’s Bank of China also fixed the daily dollar-yuan rate midpoint at a substantially weaker level on Wednesday from the prior session, sending a bearish signal to markets. 

This, coupled with rampant disinflation in the country, spurred renewed bets that the PBOC will further cut interest rates to spruce up local economic growth.

China’s benchmark Loan Prime Rate is already at historical lows, following a string of cuts by the PBOC last year. This had also seen the yuan breach the 7 level in August 2022, with the currency sliding to 15-year lows in the aftermath. The offshore yuan had hit record lows in 2022 after crossing the 7 level.

The yuan had then only recovered past the 7 level by late-December, as the relaxing of anti-COVID measures spurred optimism over a Chinese economic rebound this year.

But with the recovery now appearing to have run out of steam, currency traders dumped the Chinese currency. The yuan also came under pressure from a rebound in the dollar and Treasury yields, following a string of hawkish signals from Federal Reserve officials this week.