China’s yuan eased to a more than one-month low against the dollar on Wednesday, pressured by a stronger greenback after sticky US inflation data suggested interest rates in the world’s largest economy could go higher for longer.
The yuan also came under pressure as China’s central bank ramped up medium-term liquidity injections as it rolled over maturing policy loans.
The dollar firmed as US consumer prices accelerated in January as Americans continued to be burdened by higher costs for rental housing and food, suggesting that the Federal Reserve was far from pausing its interest rate hiking campaign.
“The stubbornly high US inflation reignited fears of Fed’s tightening and EM Asian currencies came under pressure,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank.
“Considering the People’s Bank of China’s (PBOC) relatively neutral monetary stance, the CNY may show resilience to the Fed’s tightening and potential USD rally.”
Prior to the market opening, the PBOC set the midpoint rate at 6.8183 per dollar, 47 pips weaker than the previous fix of 6.8136, the weakest guidance since Jan. 9.
In the spot market, the onshore yuan opened at 6.8237 per dollar and slipped to a low of 6.8448 at one point, the weakest level since Jan. 6.
By midday, it was changing hands at 6.8419, 110 pips softer than the previous late session close.
Currency traders said higher Treasury yields and the PBOC’s heavy liquidity injections earlier in the session widened the interest rate gap between China and the United States and pressured the local currency.
The widening yield differential also reflected in the forwards market, with one-year swap to -1,760 points, the lowest level since Jan. 9.
Earlier in the day, the PBOC stepped up liquidity injections by offering 499 billion yuan ($73.11 billion) worth of one-year medium-term lending facility (MLF) loans to some financial institutions unchanged at 2.75% from the previous operation, as expected.
With 300 billion yuan worth of MLF loans set to expire this month, the operation resulted in a net 199 billion yuan of fresh fund offerings into the banking system.
Markets believe the PBOC is keen to maintain sufficient liquidity to support an economic recovery after Beijing exited from its strict zero-COVID strategy in December.
By midday, the global dollar index rose to 103.394 from the previous close of 103.233, while the offshore yuan was trading at 6.8521 per dollar.
The one-year forward value for the offshore yuan traded at 6.6834 per dollar, indicating a roughly 2.52% appreciation within 12 months.
