On Monday the yuan plunged more than 1% against the dollar in China, outpacing declines in emerging-market currencies as concerns over the nation's economic slowdown mounts.
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The onshore currency dropped to a low of 6.7321, its lowest level since November 2020, after data showed that export growth in April fell to just 3.9% as Covid outbreaks bite. The sentiment was weighed down by a lack of notable dollar selling from state-owned banks, according to traders who asked not to be identified as they aren't allowed to comment on the foreign-exchange market publicly.
Chris Turner, a strategist at ING Bank, wrote in a note that investors continue to assess the prospects for China's economy and asset markets. With industrial metals taking another leg lower, it seems too early to call the low in the yuan. The decline raises questions about how far the People's Bank of China will let the yuan weaken, with the currency often seen as an anchor for peers in the region, given the extensive trade links. The central bank set the reference rate at a stronger than expected level for a fifth day on Monday, a sign that the authorities are trying to slow down the depreciation.
The two-year rally in the yuan has reversed since last month, as a Covid outbreak prompted the government to lock down cities including Shanghai. Bond yields in the U.S. have climbed above China's, leading to record fixed-income outflows. Since the official China Foreign Exchange Trade System began compiling the data in April, the yuan s 4% drop in April marked the record depreciation.
Bipan Rai, head foreign-exchange strategist at Canadian Imperial Bank of Commerce, wrote in a note that one of the stories of the past few weeks has been the stunning reversal of the yuan. The U.S. and Chinese economies have had a decoupling over the past year, which has resulted in an extension of that. He wrote that there should be signs of this continuing to put upward pressure on the dollar against the yuan.
The yuan is dropping so quickly that it is outstripping the new forecasts made by analysts and traders. A survey of 11 traders and analysts by Bloomberg shows that the yuan is expected to drop to 6.7 per dollar in three months. It was trading at 6.3620 at the beginning of April.
Analysts think the depreciation will get out of control. Seperate Bloomberg surveys showed that only Capital Economics sees the yuan declining to 7 per dollar by December, with other analysts predicting stronger levels.
The PBOC will use the many tools it has for counter-cyclical adjustments if the yuan fluctuates too much, China Securities Journal said earlier in the day. The central bank said in its first-quarter monetary policy report that it pledged to keep the normal operations of the foreign exchange market and to keep the basic stability of the currency at a reasonable and balanced level.
The central bank lowered the foreign-currency reserve ratio to 8% from 9% last month, a move that was intended to support the yuan by adding more dollar supply. Analysts said that the PBOC could cut the reserve ratio if the yuan decline accelerates.
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