Investors rush to return to the US, where rates are rising
China’s currency, the yuan, suffered its worst weekly drop since 2015 on Friday as investors fretted over the economy and the Federal Reserve’s policy of making Chinese bonds less attractive.
The offshore yuan traded at around $6.53 per dollar on Friday, according to Bloomberg prices.
It has fallen about 2.4% since opening at 6.38 per dollar on Monday. This resulted in the worst weekly drop since early August 2015, when the government surprised the markets by devaluing the currency.
The yuan came under pressure as the US Federal Reserve prepared to quickly raise interest rates in response to hot inflation. US bond yields soared as investors demanded higher returns on their investments to reflect rising interest rates.
Rising US yields, in turn, made Chinese securities less attractive, forcing investors to sell the yuan. The dollar index, which measures the US dollar against a basket of currencies, is up about 2.7% over the past month to 100.93.
“In China, the yuan sell-off threatens to be something of a rout,” said Geoffrey Halley, senior Asian market analyst at foreign exchange firm Oanda. “Price action this week suggests that foreign money leaving China’s stock and bond markets is at risk of becoming a flood.”
Analysts say China’s economy is also a concern. The government’s strict COVID-19 policy has led to lockdowns in cities like Shanghai, and the conflict between Russia and Ukraine has further clouded the outlook.
The International Monetary Fund lowered its forecast for China’s economic growth to 4.4% this year, while expecting growth of 4.8% in January. He cut his US growth forecast by 0.3 percentage points to 3.7%.
The Chinese yuan is strictly controlled by the country’s central bank. The People’s Bank of China sets a trading point for the yuan within the continent every day and allows it to move 2% in any direction. The offshore yuan is influenced by the continental currency, although it is considered to be free floating.
On Wednesday, the PBOC set a lower-than-expected fixing for the local yuan, which analysts say could boost Chinese imports, making them cheaper in relative terms.
Craig Botham, chief China economist at Pantheon Macroeconomics, said he expects the currency to weaken further as the economy slows in the second quarter.
“We expect the yuan to reach 6.8 per dollar by the end of the year, with risks mainly directed towards the depreciation,” he said.
Souece: Insider
