China’s Yuan Hits Two-week Low as C.Bank Ramps up Liquidity Injection

Reuters file photo
People’s Bank of China (PBOC), the central bank, in Beijing, China September 28, 2018.

SHANGHAI, Oct 16 (Reuters) – China’s yuan weakened against the dollar on Monday, hitting two-week lows, as the People’s Bank of China (PBOC) ramped up liquidity support to shore up a wobbly economy.

Analysts expect growing divergence between a hawkish U.S. Federal Reserve and a dovish PBOC, potentially weakening the yuan further despite Beijing’s efforts to stabilize the currency.

The spot yuan was changing hands at roughly 7.3090 at midday, slight softer than the previous late session close. It earlier hit 7.3103, the weakest level since Sept 28.

The weakness came even as the PBOC has continued to push against yuan bears by consistently fixing the currency on the stronger side in recent months. The central bank on Monday set the midpoint rate steady at 7.1798.

“We don’t think there’s a line-in-the-sand dollar/renminbi level that the PBOC is fundamentally preoccupied with,” Oxford Economics wrote.

“Rather, the PBOC is aiming to stem an uncontrolled depreciation that would be financially destabilizing.”

China’s central injected a net 289 billion yuan ($39.54 billion) into the banking system through medium-term lending facility (MLF) operations on Monday, while keeping the policy rate steady at 2.5%. It was the biggest liquidity injection since December 2020, according to UBS.

The PBOC is walking a tight rope between keeping liquidity ample in a struggling economy and stabilizing the yuan amid expectations of “higher for longer” U.S. rates.

On Friday, China released a mixed batch of economic data that showed while the economy was continuing to stabilize, a durable recovery was still some way off.

UBS on Monday revised its year-end yuan projection to 7.30 from previous forecast of 7.15, citing prospects of widening interest rate gaps between the U.S. and China in a strong dollar environment.

“That said, we maintain our expectation that the PBOC will use various tools to prevent further CNY weakness much beyond 7.3,” wrote Tao Wang, Chief China Economist at UBS Investment Bank.