China’s yuan slumps to near 8-month low after soft inflation

China’s yuan slid to nearly eight-month lows against the U.S. dollar on Wednesday, after data showed the country’s consumer inflation missed expectations, while a strong greenback also pressured the Chinese currency. The dollar was on the front foot on Wednesday having rebounded from a three-week low after Federal Reserve Chair Jerome Powell struck a cautious tone on how soon interest rate cuts would come. By 0345 GMT, the yuan was 0.04% lower at 7.2756 to the dollar after trading in a range of 7.2734 to 7.2761. China’s consumer prices grew for a fifth month in June but missed expectations, while producer price deflation persisted, with domestic demand stuck on a slow recovery path despite a flurry of government support measures to help the economy. “The risk of deflation has not faded in China. Domestic demand remains weak,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management.

Prior to the market opening, the People’s Bank of China set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1342 per dollar, its weakest since Nov. 21, 2023 and 1,369 pips firmer than a Reuters’ estimate. The central bank has been gradually lowering its daily yuan official guidance, well within market projections but with a bias suggesting it is allowing some depreciation, traders and analysts said. The spot yuan opened at 7.2734 per dollar and was last trading 36 pips lower than the previous late session close and 1.98% weaker than the midpoint.

The yuan is down 0.1% against the dollar this month, and 2.4% weaker this year. It has been under pressure since early 2023 as domestic woes around a moribund property sector, anaemic consumption and falling yields drive capital flows out of the yuan, and foreign investors stay away from China’s struggling stock market.

In the first day of testimony to Congress on Tuesday, Powell said that inflation “remains above” the U.S. Federal Reserve’s 2% target, but has been improving in recent months and “more good data would strengthen” the case for central bank interest rate cuts. “That might have been construed as a tad less dovish than markets were positioning for given a slew of data that had suggested that the economy is slowing,” said Maybank analysts in a note.

“It is common for currencies to weaken against the dollar this year, as the Fed has been unwilling to cut interest rates. September may be a turning point,” said Yifan Hu, regional chief investment officer at APAC of UBS Global Wealth Management. Hu expected the yuan to maintain a bearish trend until September, hovering around 7.3 this year, and it will return to 7.2 with U.S. interest rate cuts next year.

Based on Wednesday’s official guidance, the yuan is allowed to drop as far as 7.2769. The offshore yuan traded at 7.2908 yuan per dollar, down about 0.03%. The dollar’s six-currency index was 0.038% lower at 105.08. Key onshore vs offshore levels: * Overnight dollar/yuan swap onshore -7.90 pips vs. offshore -7.90 * Three-month SHIBOR 1.9 % vs. 3-month CNH HIBOR 3.2 % LEVELS AT 03:44 GMT GMT INSTRUMENT CURRENT UP/DOWN(-) % CHANGE DAY’S HIGH DAY’S vs USD VS. PREVIOUS YR-TO-DATE LOW CLOSE % Spot yuan 7.2756 -0.04 -2.39 7.2734 7.2761

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