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The yuan is still biased toward depreciation

The Chinese yuan returned slightly firmer from a three-day market holiday on Thursday, as the central bank set a more robust fixing and the dollar retreated on lower prospects for rapid US rate hikes.

The dollar fell overnight from a five-year high after US Federal Reserve Chair Jerome Powell said the bank was not actively considering 75-basis-point rate hikes to follow Wednesday’s 50-basis-point move.

The dollar had its best month since April 2015, as fears of a weakening global economy and a hawkish Fed boosted demand for the currency. In China, the yuan suffered its worst month in nearly three years as economic headwinds from COVID lockdowns, and a diminishing yield premium over US debt intensified. The yuan stabilized late in the month after the central bank reduced the number of foreign exchange banks that must be set aside as reserves. The ruling Communist Party’s top decision-making body stated that China would step up policy support to stabilize the slowing economy. The yuan’s currency rate remained constant on Thursday. However, dealers said the causes underlying its decline had not altered.

The yuan is still depreciating, but the pace may be more orderly.

A private-sector survey released on Thursday reflected the world’s second-largest economy’s ongoing pressures, revealing that China’s services sector activity contracted at the second-fastest rate in April, hampered by tightening COVID controls. The spread of COVID incidents forced the capital Beijing to close metro stations and bus routes, as well as extend controls on many public venues, in an attempt to avoid the fate of Shanghai, which has been under strict lockdown for more than a month.

China’s Bank

The People’s Bank of China (PBOC) vowed monetary policy support on Wednesday to provide enough liquidity, assist firms affected by the country’s newest COVID-19 epidemic, and stimulate a recovery in consumption.

Spot yuan CNY=CFXS began at 6.5946 per dollar and was trading at 6.6050 about lunchtime, 40 pips higher than the late session close on Friday.

At lunchtime, the offshore yuan CNH=D3 was trading at 6.6257, down more than 200 pips from the onshore spot. On Tuesday, the offshore yuan fell to its lowest level versus the dollar since early November 2020.

Offshore one-year non-deliverable futures contracts (NDFs)CNY1YNDFOR=, widely regarded as the best available proxy for forward-looking market views of the yuan’s value, were trading at 6.6928.

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