Chinese Yuan Depreciates, Banks Step In
The Chinese yuan has fallen to its lowest level since November 17, 2023, breaking the 7.2 yuan per USD mark and dropping to 7.24 per USD in the spot market. Following this depreciation, state-owned banks have stepped in to purchase yuan using US dollars, helping the currency recover to 7.2251 at midday.
Over the past three months, the yuan has depreciated by more than 2% and has been under pressure due to increasing expectations of further monetary easing to stimulate the world’s second-largest economy, as well as the weakening Japanese yen.
Carlos Casanova, a senior economist specializing in Asia at UBP, noted that the US dollar has strengthened and the yen has weakened after the Bank of Japan ended its negative interest rate policy, weighing on the Chinese yuan. “The market seems to perceive that Asian currencies need to depreciate further against the US dollar until the US Federal Reserve cuts interest rates,” evaluated Casanova.
Before the market opened, the People’s Bank of China (PBOC) set the midpoint rate, allowing the yuan to trade within a 2% band, at 7.1004 per USD, weaker by 62 basis points compared to the previous fixed rate of 7.0942.
Traders have noted that the PBOC has been setting the midpoint rate higher than market estimates for several months.
On March 21, the Deputy Governor of the PBOC stated that China may further reduce the reserve requirement ratio for banks, along with other policy tools, as the market expects more loosening measures to boost the economy.
The sudden depreciation of the yuan has also weighed on the stock market, with the Shanghai Composite Index falling by 1.4% today.