Chinese yuan falls to weakest level in two years as hawkish Fed signals further rate hikes

Yuan – also known as yuan lost about 0.5% against the dollar on Monday in offshore trading outside mainland China. It was trading at 6.9277, its lowest level since August 2020.

The yuan in land trading also weakened significantly, dropping 0.6% from the previous session.

Risk assets tumbled globally after Powell signaled that the US central bank would fight inflation with more historical rate hikes. His comments weighed heavily on investors who were struggling with what a more aggressive rate hike could mean for the health of the economy.

“The broad strength of the US dollar is likely to continue to be supported by the Fed’s hawkish statements and divergence of growth in favor of the US dollar,” Citi analysts said in a note to clients on Monday, adding that this will continue to put pressure on Asian currencies.

They added that the yuan’s recent weakness was also due to “worse-than-expected economic data and a rate cut.”

Shares also sold off on Monday. Japan Nikkei 225 (N225) decreased by 2.7%, Korean cospi (COSPI) fell by 2.1%, while in Hong Kong hang seng (HSI) lost 0.8%. China shanghai composite (SHKOMP) shed 0.1%.
The yuan has accelerated its decline against the US dollar this year as China’s economic outlook has deteriorated and US and Chinese monetary policies have increasingly diverged. While the Fed has declared war on inflation and kept raising interest rates, the Chinese authorities have made fighting the recession a priority and are cutting rates aggressively.

Earlier this month, the People’s Bank of China unexpectedly cut interest rates after new data showed the economy lost momentum last month as Covid lockdowns resumed and the housing market slump deepened.

Analysts are also concerned about the impact on economic growth of record heat and drought in China. Already several international companies, including Tesla (TSLA) as well as Toyota (TM)experienced disruption to their factories due to power outages.

The offshore yuan has fallen 3% against the US dollar this month and is down 9.4% since March.

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The yuan’s decline since March was driven by a weakening of the yuan’s bullish positioning and large capital outflows, Citi analysts said, as traders were concerned that growth had been hurt by Covid-related restrictions.

Another factor from the government, as the Chinese authorities have been tolerant of a “gradual” weakening of the yuan, which could benefit exporters by making the prices of their goods more competitive.

“While this is unlikely to push the authorities into active currency weakness, they are likely to allow market forces to weaken or depreciate the yuan,” they said.

Citi analysts predict that the yuan will eventually hit 6.95 against the US dollar.

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