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China’s bearish PMI, virus cases hit yuan; more policy easing expected

China’s yuan extended its decline on Monday after it posted a second month of losses in July, with sentiment dampened by disappointing economic data and investor worries over spreading domestic COVID-19 cases of the Delta variant.

Prior to market opening, the People’s Bank of China (PBOC) set the midpoint rate at 6.4660 per dollar, 58 pips weaker than the previous fix of 6.4602.

In the spot market, onshore yuan opened at 6.4640 per dollar and was changing hands at 6.4653 at midday, 33 pips weaker than the previous late session close.

Traders said markets were expecting more monetary and fiscal stimulus in coming months after both official and private factory activity surveys suggested a slowdown in the Chinese economy, while local coronavirus outbreaks added to uncertainty over the uneven economic recovery.

Factory activity growth slipped sharply in July as demandcontracted for the first time in over a year, a business survey showed on Monday.

“We maintain our expectation of more supportive fiscal policy especially from on-budget spending and government bond issuance, and also continue to expect one more reserve requirement ratio (RRR) cut in Q4 this year,” economists at Goldman Sachs said in a note.

Other financial institutions including ING, OCBC Bank and Pinpoint Asset Management also saw the possibility of a further reduction in banks’ reserve requirement ratio (RRR), while HSBC and Nomura said targeted support would be more likely.

The PBOC delivered an unexpected broad-based RRR cut in July, with many market analysts and participants interpreting it as a fine-tuning liquidity move.

The ruling Communist Party’s top decision-making body said on Friday that China would stick with its current economic policies in the second half of the year, maintaining an accommodative stance amid an uneven domestic recovery and global uncertainty.

“The bottom line of monetary policy is to ensure ample liquidity with targeted support to SMEs and enterprises in need,” ANZ said in a note.

Higher liquidity should theoretically put downside pressure on the currency, but improving economic fundamentals should support the yuan in the long run, traders said.

They added that concerns about the domestic economic recovery in the second half of this year weighed on the FX market on Monday morning.

A trader at a foreign bank said the yuan was likely to continue range trading ahead of this week’s U.S. jobs data that could affect the timing of the Federal Reserve’s tapering of stimulus.
The greenback held just above a one-month low, with the global dollar index falling to 92.08 at midday from the previous close of 92.108.

The offshore yuan was trading at 6.4678 per dollar by midday.

The yuan market at 0342 GMT: 
    
    ONSHORE SPOT:
 Item               Current  Previous  Change
 PBOC midpoint      6.466    6.4602    -0.09%
                                       
 Spot yuan          6.4653   6.462     -0.05%
                                       
 Divergence from    -0.01%             
 midpoint*                             
 Spot change YTD                       0.97%
 Spot change since 2005                28.01%
 revaluation                           
 
    Key indexes:
     
 Item            Current     Previous  Change
                                       
 Thomson         98.39       98.4      0.0
 Reuters/HKEX                          
 CNH index                             
 Dollar index    92.08       92.108    0.0

*Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint.

OFFSHORE CNH MARKET

The People’s Bank of China (PBOC) allows the exchange rate to rise or fall 2% from official midpoint rate it sets each morning.

*Premium for offshore spot over onshore
**Figure reflects difference from PBOC’s official midpoint, since non-deliverable forwards are settled against the midpoint.
Source: Reuters (Reporting by Winni Zhou and Andrew Galbraith; Editing by Jacqueline Wong)

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