China’s onshore yuan breaches key 7/dlr mark for first time in 2 years

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SHANGHAI — China’s yuan weakened past the psychologically important 7 per U.S. dollar level for the first time in two years on Friday, pressured by a buoyant dollar and strong market expectations for an even more aggressive U.S. interest rate hike next week.

The onshore yuan breached the level in early trade. It was at 7.0144 as of 0225 GMT, in a catch-up move with its offshore counterpart, which crossed the key threshold during European hours on Thursday. The offshore yuan last traded at 7.0248.

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Prior to market open, the People’s Bank of China (PBOC) set the yuan’s midpoint rate at 6.9305 per dollar, 204 pips or 0.3% weaker than the previous fix 6.9101.

The sizable loss in Friday’s midpoint fixing indicates the central bank might have allowed the yuan to cross the 7 per dollar mark, said Ken Cheung, chief Asian FX strategist at Mizuho Bank.

“As long as the pace of depreciation is not too fast and remains under control, it should be fine.”

The yuan had only breached the 7 mark twice since the global financial crisis of 2008. Crossing the level could stoke fear of capital outflows just as authorities want to marshal resources to revive an economy reeling from COVID-19 outbreaks and a weak property market.

Official data showed overseas investors cut holdings of Chinese bonds for a seventh consecutive month in August, discouraged by the weakening yuan and widening yield differentials with the United States.

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However, earlier on Friday, several state media outlets published commentaries that sought at stabilize market expectations and played down any significance of the key level.

State broadcaster CCTV cited the foreign exchange regulator as saying the yuan’s performance was prudent and much better than most other currencies over the past year.

“Seven was basically just this psychological level that people were looking at, and the market was definitely more focused on (it) than the PBOC from a policy perspective,” said Galvin Chia, emerging markets strategist at NatWest Markets.

“It’s clear that in this round, there hasn’t actually been a push back at a specific level, like a defense at a certain level. It’s just pushing back on the weakness.” (Reporting by Asian bureaus; Editing by Muralikumar Anantharaman)

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