Yuan Softens Against Dollar as Economic Data Fuels Easing Speculation

On the first trading day of the year, China’s yuan faced downward pressure against the dollar, driven by increasing expectations of monetary easing. This follows data indicating a third consecutive month of shrinking manufacturing activity in December, underscoring the uneven nature of the recovery in the world’s second-largest economy.

Official figures revealed that China’s manufacturing activity weakened more than anticipated, even as a separate private survey indicated an expansion at a quicker pace. Analysts from Capital Economics noted that policy support is likely to act as a tailwind in the coming months, anticipating additional fiscal support and monetary easing measures following the Central Economic Work Conference in early December.

The economists at Capital Economics foresee further reductions in lending rates, with expectations of 20 basis points of policy rate cuts and one more reserve requirement ratio (RRR) reduction in the first half of the year.

Ahead of market opening, the People’s Bank of China (PBOC) set the midpoint rate at 7.0770 per dollar, slightly firmer than the previous fix. The central bank’s trend of setting official guidance rates at levels stronger than market projections in 2023 persisted, signaling an effort to maintain stability in the yuan.

In the spot market, the onshore yuan opened at 7.1072 per dollar and was at 7.1262 at midday, indicating a slight weakening from the previous late session close. The yuan concluded 2023 with a 2.8% decline against the dollar, marking its second consecutive yearly drop, influenced by a sluggish economic recovery and policy divergence with major economies.

As the U.S. Federal Reserve hints at potential interest rate cuts, market watchers expect the yield differentials between the U.S. and China to narrow, alleviating some downward pressure on the Chinese currency in the coming year. The market is currently pricing in an 86% chance of Fed rate cuts beginning in March, with over 150 basis points of easing anticipated in 2024.

By midday, the global dollar index stood at 101.545, while the offshore yuan was trading at 7.132 per dollar.

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