China’s yuan weakens as U.S. dollar gains on sustained inflation outlook

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HONG KONG — China’s yuan weakened on

Wednesday, as the U.S. dollar strengthened on expectations of a

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sustained inflationary trend fueled by a prospective surge of

outbound Chinese travelers.

China said on Tuesday it would drop its quarantine rules for

inbound travelers starting January 8, largely reopening a border

that has been locked up for almost three years.

Searches for cross-border destinations on travel platforms

have since jumped tenfold, because the rule change will make

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outbound tourism practicable. Since 2020, few Chinese have

wanted to endure quarantine just for a foreign holiday.

“The surge expected for outbound tourists from China has

fueled an expectation that their consumption abroad will also

make inflation in the US and Europe more entrenched, sending

their currencies stronger on Tuesday,” said Ken Cheung, chief

Asian FX strategist at Mizuho Bank.

The spot yuan opened at 6.9610 per dollar and was

changing hands at 6.9747 at midday, 146 pips weaker the previous

late session close and 0.09% away from the midpoint.

The People’s Bank of China set the midpoint rate

at 6.9681 per U.S. dollar prior to market open, weaker than the

previous fix, 6.9546. The spot rate is currently allowed to

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trade 2% above or below the official fixing on any given day.

The global dollar index rose to 104.266 from the

previous close of 104.179. Against the yen, the dollar reached a

more than one-week high, at 133.685 yen.

The removal of the quarantine requirement, following earlier

moves, amounts to almost complete reopening of the economy

earlier than expected, some analysts said.

Goldman Sachs said in a Tuesday research note that daily new

cases in China may peak in late December or in January, citing

experience from Hong Kong and Taiwan.

It forecasts GDP growth for the full year of 2023 at 5.2%.

China’s economy, the world’s second-largest, is on track to miss

its 2022 annual growth target of around 5.5%, analysts have

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said.

“We maintain our view that China reopening is positive for

(onshore yuan), and believe improved growth expectations in 2023

might outweigh unfavorable factors such as deterioration in

goods and service trade balances,” Goldman Sachs said.

Goldman Sachs maintains its USD/CNY 12-month forecast at

6.90.

The offshore yuan was trading 0.08% stronger than

the onshore spot at 6.9694 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 6.8067, 2.37% away from the midpoint.

One-year NDFs are settled against the midpoint, not the spot

rate.

The yuan market at 3:28AM GMT:

ONSHORE SPOT:

Item Current Previous Change

PBOC midpoint

-0.19%

6.9681 6.9546

Spot yuan

-0.21%

6.9749 6.9601

Divergence from

midpoint*

0.10%

Spot change YTD

-8.89%

Spot change since 2005

revaluation 18.66%

OFFSHORE CNH MARKET

Instrument Current Difference

from onshore

Offshore spot yuan

* 0.08%

6.9694

Offshore

non-deliverable 2.37%

forwards 6.8067

**

*Premium for offshore spot over onshore

**Figure reflects difference from PBOC’s official midpoint,

since non-deliverable forwards are settled against the midpoint.

.

(Reporting by Georgina Lee; Editing by Bradley Perrett)