SHANGHAI – China’s yuan weakened to a one-month low against the dollar on Wednesday, weighed down by growing market expectations of further monetary easing in the world’s second largest economy.
Market participants have largely priced in a reduction to policy rates in the near term after major Chinese lenders lowered deposit rates late last year. Bets of further stimulus ratcheted up after Zou Lan, monetary policy department head of People’s Bank of China (PBOC), highlighted reserve requirements as one of monetary policy options to support credit growth.
“We continue to see quantitative/liquidity measures as the main policy focus,” Frances Cheung, rates strategist at OCBC Bank, said in a note.
“More of these measures being put forward may limit the scope for an outright interest rate cut, although an interest rate cut can still materialize if the authority wants to double down on support.”
Some investment houses expect rate cuts could happen as early as next week, when China is set to roll over 779 billion yuan ($108.58 billion) worth of medium-term policy loans due this month on Jan. 15. And it may lower rates at a monthly loan prime rate (LPR) fixing on Jan. 22.
In light of the heightened easing expectations, yields on China’s benchmark 10-year government bonds hovered below the psychologically important 2.5 percent on Wednesday and pressured the local currency.
Prior to market opening, the PBOC set the midpoint rate, around which the yuan is allowed to trade in a 2 percent band, at 7.1055 per dollar, weaker than the previous fix of 7.1010.
The central bank continued its months-long trend of setting the official guidance rate at levels firmer than market projections, traders and analysts said, a move widely seen as an attempt to prevent the yuan from falling too rapidly.
Wednesday’s midpoint was 563 pips firmer than a Reuters estimate of 7.1618.
