China’s yuan dropped to a near two-year low against the dollar on Monday, as Beijing cut key lending rates to counter its economic slowdown.
The PBOC’s rate cuts comes as the US Federal Reserve continues aggressive monetary tightening, plus concern about the risk of capital outflows and currency depreciation.
Yuan trades in both onshore and offshore quickly slipped after China’s central bank cut its benchmark lending rate and lowered the mortgage reference by a bigger margin, as Beijing boosts efforts to revive an economy hobbled by a property crisis and a resurgence of Covid cases.
The onshore yuan opened at 6.8202 per dollar and touched a low of 6.8308. By midday, it was changing hands at 6.8243, 73 pips weaker than the previous late session close.
At the close of the domestic trading session the onshore yuan finished at 6.8384, its weakest close since September 10, 2020.
Its offshore counterpart fell to a near two-year low of 6.8520 before trading at 6.8394 at noon. It was trading at 6.8585 shortly the close of local trading.
Traders said the gap between onshore and offshore widened further to 151 pips in morning deals, a sign that depreciation expectations might have picked up as the offshore yuan trades more freely and better reflects market fundamentals.
“Overall, the RMB [yuan] depreciation is the reflection of monetary policy divergence, interest rate differential and market pricing of bleak China growth outlook, instead of a cause of emerging market crisis,” Ken Cheung, chief Asian FX strategist at Mizuho Bank, said.
“We reckon that the People’s Bank of China (PBOC) will tolerate more RMB depreciation at this stage.”
Prior to market opening, the PBOC set the midpoint rate at 6.8198 per dollar, 133 pips or 0.2% weaker than the previous fix of 6.8065, the softest since September 28, 2020.
“The unexpected slowdown in the economy in July was rather broad-based and the PBOC could remain in easing mode as long as the economy is under pressure from zero-Covid strategy, weak property sector and more recently, power crunch in Sichuan and Chongqing,” analysts at Maybank said in a note.
- Reuters with additional editing by Jim Pollard
NOTE: This report was updated with prices after the close of domestic trading.