SHANGHAI (Reuters) – China’s yuan fell to a four-month low against the dollar on Friday on expectations of monetary easing, crossing a key threshold and prompting state banks to intervene to defend the currency.
In the spot market, the decline fell to the weak side of the psychologically important 7.2 per dollar level in early trade and touched a low of 7.24, the weakest since Nov. 17, 2023. However, these weak levels were no longer visible on the charts. to close onshore trading with the day’s low at 7.2303 according to LSEG Eikon data.
Market sources told Reuters that state-owned banks had stepped in to buy the yuan with dollars. At the close of the domestic session (0830 GMT), the yuan traded at 7.2275, down 281 points from the previous session’s close.
The sources declined to be identified because they were not authorized to speak publicly about market transactions.
The yuan has fallen about 2% in three months and has been pressured by rising market expectations for further monetary easing to support the world’s second-largest economy as well as a weaker Japanese yen.
Carlos Casanova, senior Asia economist at UBP, said a stronger dollar and sharp depreciation in the yen and some Asian currencies after the Bank of Japan ended its negative interest rate policy had weighed on the yuan.
“The market appears to have realized that Asian currencies should continue to depreciate against the US dollar until the day the Fed cuts interest rates,” he said.
Before the market opened, the People’s Bank of China (PBOC) set the average rate around which the yuan is allowed to trade in a 2% band at 7.1004 per dollar, 62 points below the previous fixed level of 7.0942.
The Chinese central bank has been setting rates for months at a level more sustainable than market forecasts, traders said.
Friday’s midpoint was 1,143 points above the Reuters estimate of 7.2147, the biggest difference since November.
It weakened to 7.2723 in late Asian trade, its weakest since Nov. 14, 2023.
Traders blamed the yuan’s sudden weakness on rising expectations of monetary easing after senior PBOC officials hinted at further scope to ease bank reserve requirements.
China has room to further cut its bank reserve requirement ratio (RRR), among other policy tools at its disposal, a deputy central bank governor said on Thursday, highlighting market expectations for additional easing measures to support the economy.
Ju Wang, head of Greater China currency and interest rate strategy at BNP Paribas (OTC:), expects the central bank’s announcement of further monetary easing will push the yuan to test lows around 7.3 again.
The yuan’s sudden weakness also weighed on stock markets, with Shanghai’s benchmark stock index falling 1%.
If there are signs that China allows the yuan to depreciate from 7.2 to 7.3, “that will definitely make it difficult for this equity rally to continue because a lot of people will try to diversify into the U.S. dollar,” Casanova said.