Chinese Yuan Extends Drop to Six-Month Low as U.S. Yields Rise

(Bloomberg) -- The yuan slipped to its weakest level in six months, pressured by concern surrounding China’s growth outlook and a surge in U.S. Treasury yields.

China’s offshore currency weakened by as much as 0.7% to 6.4230 per dollar in New York trading, its lowest since October 2021. The decline comes as a growing number of traders fear the world’s second-largest economy is becoming snarled in lockdowns -- igniting fresh chaos to global supply chains. 

The yuan was also pressured by a rise in U.S. yields and the greenback on odds of even more aggressive Federal Reserve tightening. 

On Monday, China’s central bank unveiled nearly two dozen measures and promises intended to boost lending and support industries that have been beaten down by recent Covid disruptions, including a pledge to guide banks to expand loan extensions.

“This is the strongest signal yet from Chinese authorities that they are concerned over growth conditions,” said Simon Harvey, head of currency analysis at Monex Europe. “Coupled with regulatory tightening in the tech sector, the increased level of concern over domestic growth suggests a poor year for Chinese equity returns. Today’s currency reaction is reflective of this.”

The offshore yuan pared some of Tuesday’s losses to trade 0.1% higher on Wednesday at 6.4150 per dollar.

Growth Concern

Although first-quarter GDP data showed a pick-up in growth, a deceleration in production and retail data in March has economists further worried about China’s growth outlook. Last week, the PBOC cut its benchmark reserve requirement ratio, and all eyes are now on whether it will reduce the Loan Prime Rate Wednesday. Yields on the 10-year Chinese government bond yield have stayed relatively flat this year, while most other global government yields barrel higher.

“We think this backdrop, of slowing economic growth and policy easing, will keep government bond yields in China under pressure over the course of the year,” Jonathan Peterson, markets economist at Capital Economics, wrote in a note. “By contrast, strong inflationary pressures in the U.S., and the Fed’s increasingly aggressive response, suggests to us that long-term Treasury yields have not yet reached their peak.”

In the U.S., investors are ramping up bets for the size of the Fed’s next interest rate hike. While markets are generally pricing in a 50-basis-point hike, St. Louis Fed President James Bullard said Monday that hikes of as much as 75 basis points shouldn’t be ruled out. Treasury yields surged across the curve on Tuesday, with the benchmark 30-year bond rising above 3% for the first time in three years.

All that likely deepened losses for the yuan, which on Tuesday breached the key support level of its 200-day moving average. A Bloomberg real-time replica of the CFETS index, a gauge of the yuan’s strength versus currencies of China’s 24 trading partners, fell 0.3% Tuesday, the most since March 29. Japan’s yen also plunged, set to extend its longest losing streak in more than half a century.

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