Yuan hits 1-1/2-year low as zero-Covid policy rattles investors

THE yuan weakened sharply against a strengthening US dollar on Friday, touching a 1-1/2-year low as Beijing’s pledge to double down its zero-Covid policy hit market sentiment. Both the onshore spot yuan and its offshore counterpart slipped to their weakest levels against the dollar since Nov 4, 2020. Those sharp declines came despite stronger-than-expected central bank guidance for the yuan. Prior to market opening, the People’s Bank of China (PBOC) set its midpoint guidance at a 1-1/2-year low of 6.6332 per dollar, 660 pips or 1 per cent weaker than the previous fix, but 70 pips firmer than Reuters’ estimate for the fixing. The slightly stronger-than-expected midpoint, usually interpreted by markets as the official stance on foreign exchange policy, failed to stem the rapid losses in the yuan on Friday. The onshore yuan weakened to a low of 6.6982 per dollar at one point in early trade, not far from the psychologically important 6.7 per dollar, with some market participants saying a breach of that threshold could prompt further losses. By midday, the onshore spot traded at 6.6743 per dollar, 208 pips softer than the previous late session close while its offshore counterpart eased to 6.7107. Xing Zhaopeng, senior China strategist at ANZ, said broad dollar strength in light of the Federal Reserve’s hawkish stance added pressure to the Chinese currency. “Currently, the yuan is bearing the most depreciation pressure, and such stress may ease in the third quarter of this year,” Xing said, expecting the yuan to trade in a range of 6.6 to 6.8 by end-June. Xing and several currency traders noted companies will soon start making dividend payments to overseas shareholders, and such dollar demand could weigh further on the yuan. “However, we should not discount the supportive factors for the yuan ... policymakers would use policy tools to guide the market, which has been somewhat decoupled from the fundamentals,” said Marco Sun, chief financial market analyst at MUFG Bank. “If the exchange rate loses its two-way volatility, window guidance may follow,” Sun added, expecting the yuan to trade in a range of 6.50 to 6.65 in the second quarter. “Window guidance” refers to requests by regulators to market participants not to aggressively make one-way bets on the currency, which has taken place in the past when the yuan declined heavily. Separately, Beijing’s pledge to fight any comments and actions that distort, doubt or deny the country’s Covid-19 response policy also dented market sentiment, traders said. The reaffirmation of the zero-Covid policy also roiled stock markets, with major stock indexes plunging in morning trade. The blue chip CSI 300 index fell about 2.6 per cent on Friday morning, heading for its worst session since April 25. “The economy was barely mentioned at the meeting, suggesting Beijing may have become more determined to maintain the zero-COVID strategy,” said Lu Ting, chief China economist at Nomura. Lockdowns in dozens of cities across the country during the latest wave of Covid-19 infection, stringent prevention pressures and mobility restrictions have prompted heightened investor concern over wider disruption to economic activity. REUTERS