What’s going on here?
China’s yuan slid to near eight-month lows against the US dollar, trading at 7.2756, despite government efforts to stabilize it.
What does this mean?
This drop in the yuan comes as China’s consumer prices grew for the fifth straight month in June but still missed expectations. Producer price deflation persists, hinting at weak domestic demand, despite government efforts to prop up the economy. The People’s Bank of China set the midpoint rate at 7.1342 per dollar, its weakest since November 2023, and has been steadily lowering its daily guidance rates. Meanwhile, Federal Reserve Chair Jerome Powell noted that US inflation is still above the 2% target but shows signs of improvement. His cautious approach to interest rate cuts boosted the US dollar, putting additional pressure on the yuan.
Why should I care?
For markets: The dollar takes the win.
Maybank analysts note that the Fed’s reluctance to cut rates has weakened various currencies against the US dollar. According to Yifan Hu at UBS Global Wealth Management, the yuan will likely remain bearish until September, potentially returning to 7.2 with US rate cuts anticipated next year. The yuan is down 0.1% against the dollar this month and has fallen 2.4% this year, pressured by domestic challenges like a sluggish property sector and weak consumption. This has left foreign investors wary of China’s struggling stock market.
The bigger picture: Deflation and demand pose risks.
The chief economist at Pinpoint Asset Management underscores the risk of deflation and weak domestic demand in China. As China grapples with these economic issues, its currency’s devaluation allows it to drop as far as 7.2769 under current official guidance. Given the three-month SHIBOR at 1.9% versus the three-month CNH HIBOR at 3.2%, there’s notable liquidity stress within domestic financial markets. Meanwhile, the US dollar’s strength continues, with the dollar index slightly lower at 105.08. These dynamics contribute to broader global economic shifts and highlight the interconnectedness of major economies.
