Offshore Yuan Falls to All-Time Low on Hawkish Fed Rhetoric
The offshore yuan fell to a record low as sentiment was damped by hawkish comments from Federal Reserve officials and deepening concerns on the domestic economy.
(Bloomberg) -- The offshore yuan fell to a record low as sentiment was damped by hawkish comments from Federal Reserve officials and deepening concerns on the domestic economy.
China’s offshore yuan fell 0.4% to 7.2048 per dollar, the lowest since 2010 when the offshore unit started trading. The onshore yuan has fallen more than 4% against the dollar this month and is on track for worst annual loss since 1994.
The yuan is under pressure to fall as the nation’s monetary policy with the US diverges further as the Federal Reserve hikes rates. Fed officials including St. Louis Fed chief James Bullard on Tuesday pushed for higher interest rates in the US to restore price stability. The People’s Bank of China on the other hand is maintaining an accommodative stance amid the rising risk of deflation as demand crumbles under the weight of an ongoing property crisis and Covid restrictions.
The central bank held a key policy rate steady this month to stem the yuan’s weakness. It also set stronger-than-expected yuan fixings for 25 straight sessions, the longest streak on record since Bloomberg started the survey in 2018. Earlier this week it imposed a risk reserve requirement of 20% on currency forward sales by banks to make it more expensive to short the yuan. That’s after an earlier move to reduce the foreign-currency reserve requirement for banks, which was also aimed at boosting the currency. PBOC’s currency defense so far has only slowed the currency’s depreciation.
Its not just China, policymakers in Japan, South Korea and India are also stepping up their currency defense as the dollar’s rally shows few signs of easing. Asian central banks may activate the ‘second line of defense’ such as macroprudential and capital accounts tools, according to a note from Nomura Holdings Inc. Taiwan officials Tuesday raised the prospect of foreign-exchange controls and a ban on stock short sales if capital outflows worsen significantly.
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