China's yuan set for biggest weekly fall in 4 years as economy stumbles

CHINA'S yuan extended losses against the US dollar on Friday (Apr 22) and looked set for its worst week in nearly 4 years, sparking questions over whether authorities were allowing it to weaken to cushion the country's sharp economic slowdown.

A hawkish US Federal Reserve, the vanishing Chinese yield advantage and growing economic pressures have dragged the yuan, or renminbi, to seven-month lows. Many of China's biggest cities, including Shanghai, are in Covid-19 lockdowns.

The yuan's losses accelerated on Friday after a breach of the psychologically critical 6.4 per US dollar level, with the onshore yuan finishing the domestic session at 6.4875.

For the week, the tightly-managed currency fell 1.8 per cent against the greenback, the biggest weekly drop since June 2018.

Its offshore counterpart touched a low of 6.5265, and is on course for its worst weekly performance since August 2015, when China engineered a sharp one-off devaluation.

"The macro outlook for China and the renminbi have certainly shifted significantly over the last several weeks on account of the Covid-driven lockdowns and disruptions in large parts of the country, especially Shanghai," said Alvin Tan, Asia FX strategist at Royal Bank of Canada.

But, some stakeholders were actually "quite happy" with such yuan weakness, which could alleviate pressure on Chinese exporters that are suffering from lockdowns, traders said.

"Export growth is likely to slow, so allowing some weakness in the yuan at this point is fine," said a trader at a Chinese bank.

Several traders said they have not yet seen state-owned Chinese banks, which usually act on behalf of the central bank, appear in the market to stem the yuan's losses as they often do during rapid moves, which they felt was a sign of official approval for some depreciation.

The yuan's trade-weighted basket index, a gauge that measures its value against that of its trading partners, eased to a 2-month low of 104.25 on Friday. China is keen to keep the index in a certain range to make sure the country isn't disadvantaged in external trade.

In yuan options trading, the implied volatility and risk reversals only showed mild yuan depreciation pressure ahead.

Some market participants said China's ample FX deposits acquired by the private sector since the pandemic, coupled with the People's Bank of China's (PBOC) FX policy management via its daily fixing, could prevent the yuan from sinking too fast and too far.

On Friday, the PBOC set the midpoint rate at a 6-month low for the yuan at 6.4596 per US dollar, but it was 45 pips firmer than Reuters' estimate of 6.4641.

While a much weaker-than-expected fixing seen on Wednesday "was a strong policy greenlight for CNY weakness, the fix today could also be a message to check exuberant USD/CNY bulls," analysts at Maybank said in a note.

China's FX regulator told media on Friday that authorities are capable of adapting to policy changes from the Fed and authorities expect uncertainties abroad to have a small impact on the Chinese currency.

China's foreign exchange deposits hovered at a record high of US$1.05 trillion at the end of March.

Still, global financial institutions, including J.P. Morgan and UBS Global Wealth Management, revised down their forecasts for the yuan following the sharp fluctuations.

The American investment bank revised its near-term USD/CNY target to 6.50 from 6.35 for the second quarter of this year.

"Based on the pandemic outbreak in various cities places in China and the economic growth challenges, along with a more hawkish Fed", UBS Global Wealth Management revised down its forecast for the yuan to trade at 6.55 per US dollar at end-June from 6.40 previously. REUTERS