(Bloomberg) — China’s yuan has held up against the dollar in recent weeks, but that only masks a broader currency depreciation that may be set to accelerate.
This week, the currency slid to a more than four-month low against a basket of currencies of its major trading partners, according to a Bloomberg replica of the official CFETS index. In fact, the yuan has only been resilient against the dollar because the US currency itself is under pressure on signs of higher US interest rates.
The yuan basket is likely to fall further because the currency typically underperforms its Asian peers during a period of dollar weakness, said Stephen Chew, senior foreign exchange and exchange rates analyst for Asia at Bloomberg Intelligence in Hong Kong.
He said the yuan also tends to be relatively weak this time of year due to earnings outflows, while the resumption of outbound tourism, persistent geopolitical tensions, and waning reopening optimism are also headwinds.
Examples of the yuan’s broader decline can be seen at a number of intersections. The currency fell last month to its weakest level since August 2021 against the euro, while this week it fell to its lowest level since October 2021 against the pound, and earlier this month it touched the weakest level since September against the Indonesian rupiah.
Another reason for the yuan’s underperformance is the growing divergence between China’s and the United States’ yields. The three-month yuan interbank rate is 2.36%, nearly 300 basis points below the London dollar’s comparable exchange rate of 5.34%, the largest gap ever. This persuades exporters and banks to hold dollar deposits to get higher returns.
Economic data in recent weeks has cast doubt on optimism about reopening in China which was expected to boost demand for the country’s assets. In April alone, export growth slowed, manufacturing contracted unexpectedly, and the services sector expanded less than analysts expected.
At the same time, geopolitical risks are increasing. The United States is set to impose more restrictions limiting investment in key parts of the Chinese economy such as semiconductors and artificial intelligence later this month, while China is also embroiled in another diplomatic spat with Canada.
sell money
Foreign investors turned net sellers of Chinese stocks for the first time since October last month, and outflows from the country’s sovereign bonds rose to a record high in the most recent quarter, according to data compiled by Bloomberg.
“Recently, markets have been looking at Chinese economic data through a somewhat bearish lens, and there is still enough political risk premium to keep markets biased lower and to keep investor participation very low,” said Galvin Chia, currency analyst at Natwest Markets in Singapore. .
The CFETS Index, which tracks the yuan against a basket of 24 currencies of its major trading partners, fell to 99.27 last Friday, the lowest level since December. From a high of 100.53 in mid-February.
The index is likely to extend its declines to 94 to 95, Citigroup Inc (NYSE:). Strategists led by Dirk Wheeler wrote in a research note this month, pointing to the potential for widening services deficits and capital outflows.
Silent inflation
The yuan’s broader weakness may be most pronounced against those currencies that are supported by still-rapid inflation or likely to be boosted by additional interest rate increases from the central bank, such as the euro and pound, according to strategists in Australia and New Zealand. The Banking Group of Zealand (OTC:) Ltd.
ANZ strategists Erin Cheung and Brian Martin wrote in a note that the euro, yuan and pound sterling may rise further due to subdued inflation in China and bias easing. They said they could also benefit as Chinese authorities urge banks to lower deposit rates, at least until China’s economic recovery gains more momentum and sentiment improves.
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