China's yuan eases against the dollar on widening yield differential
SHANGHAI (Reuters) — China's yuan eased against the dollar on Friday, as a widening yield spread and balance sheet policy divergences between the U.S. and China remained short-term headwinds for the yuan.
The yield gap between China's 10-year government bonds and its U.S. counterparts has widened by 24 basis points (bps) since Dec. 27 to 144 bps, with the market repricing the U.S. Federal Reserve's policy easing and expectations for rate cuts in China continuing to build.
The yield on actively traded 10-year China government bonds touched the lowest point since April 2020 on Friday.
The ongoing divergence in the balance sheet policies of the Fed versus the People's Bank of China (PBOC) is a significant short-term headwind for the offshore yuan, traders at Citi said, adding that they expect further interest rate cuts and additional loan injections via China's pledged supplementary lending (PSL) facility.
China's central bank made 350 billion yuan ($48.83 billion)in loans to policy banks through its PSL facility in December, fuelling expectations of increased support for the country's ailing housing sector.
«However, we expect onshore exporter USD holdings, which look abnormally large this year, to be converted to the yuan ahead of the Lunar New Year, which should drive the yuan stronger against the dollar towards the end of January or the first week of February,» the traders said.
Prior to the market's opening, the PBOC set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1029 per U.S. dollar, 33 pips weaker than the previous fix 7.0997.
The spot yuan opened at 7.1675 per dollar and was changing hands at 7.1684 at midday, 64 pips weaker than the previous late session close.
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