HONG KONG: China’s yuan eased to a nine-month low on Wednesday, as the widening gap between US and China interest rates fuelled concerns about more outflows from yuan assets, while a drop in China’s new home prices further weighed on sentiment.
US retail sales jumped 0.7% in July, beating expectations, while data for June was revised higher. Resilient US data has boosted expectations that the Federal Reserve may hold interest rates higher for longer.
The data came on the heels of China’s central bank’s unexpected move to cut policy rates on Tuesday, in the latest sign that authorities are ramping up efforts to boost the faltering economy.
Fuelling investors’ concern about a deeper, longer-lasting growth slowdown, China’s July new home prices fell for the first time this year, down 0.2% from June.
The data shows that the embattled property sector, which accounts for a quarter of its economic activity, is far from turning the corner.
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“High-for-longer (US interest rate) environment is likely to continue to keep Asian currencies (weaker against the dollar) for a while,” said Maybank analysts in a research note on Wednesday.
Further deterioration in China’s real estate sector would continue to weigh on the country’s broader economic activity, they added.
The People’s Bank of China set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1986 per US dollar prior to market open, weaker than the previous fix 7.1768 but still nearly 900 pips stronger than market consensus.
The spot yuan opened at 7.2950 per dollar and was changing hands at 7.2965 at midday, 66 pips weaker than the previous late session close and 1.36% weaker than the midpoint.
Foreign holdings in China’s onshore yuan bonds declined in July, reversing the pick-up seen in June and May, official data showed on Tuesday.
This came at a time when the U.S benchmark 10-year treasury yields hit 4.274% on Tuesday, the highest since Oct. 24. Ten-year Chinese government bond yields hovered at 2.582% after falling to a more than three-year low on Tuesday.
The dollar index fell to 103.192 from the previous close of 103.209.
Investors are awaiting minutes from the Fed’s July 25-26 meeting, which will be released on Wednesday.
The offshore yuan was trading 0.35% weaker than the onshore spot at 7.3228 per dollar.
Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan’s value, traded at 7.098, 1.42% away from the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate.
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