Chinese Yuan Weakens Amidst Global Market Divergence
The Chinese yuan recently hit a six-month low, with widespread expectations of further weakening throughout the year.
China considers rate cuts while the US Federal Reserve contemplates rate hikes, leading banks, and Chinese companies to prepare for a depreciating currency.
The yuan has declined due to China’s slow post-pandemic recovery and weak domestic and international demand. Recent rate reductions widened the gap between Chinese and US sovereign yields to the largest in 16 years, reversing a trend of higher Chinese yields.
Investment banks revise currency forecasts as the yuan faces ongoing pressure. JP Morgan downgraded its year-end forecast to 7.25 per dollar. The yuan has depreciated nearly 4% this year, positioning it as one of the worst-performing Asian currencies.
Some banks anticipate further depreciation, potentially reaching 7.3 per dollar. The People’s Bank of China has not yet commented on the cuts to yuan forecasts or vulnerabilities from corporate positioning.
China is expected to continue implementing easing measures while Western economies struggle with inflation. Traders anticipate elevated US interest rates and China’s maintenance of low rates or further reductions.
READ MORE: Bitcoin: Here is How Much BTC the US Government Owns
China reduced its reverse repo rate and another cash rate, signaling possible additional easing. State-owned banks are advised to lower interest rates on dollar deposits to encourage conversion into yuan.
Chinese companies have accumulated $24.2 billion in excess dollar savings, and a shift to the yuan could provide support. However, companies may choose to move capital offshore, posing a risk of further yuan depreciation.
The benchmark overnight dollar interest rate trades higher than dollar deposit rates in China, making offshore accounts attractive. Capital outflow presents a clear risk for yuan depreciation, particularly with lowered dollar deposit rates exacerbating the risk.
In summary, the Chinese yuan faces expectations of continued weakening, with China and the US on divergent paths. Investment banks revise forecasts, and China implements easing measures while encouraging the conversion of dollar savings into yuan. Capital outflow and lowered deposit rates increase the risk of yuan depreciation.
Alexander Stefanov
Reporter at CoinsPress
Alex is an experienced finance journalist and a cryptocurrency and blockchain enthusiast. With over five years of experience covering the industry, he deeply understands the complex and constantly evolving world of digital assets. His insightful and thought-provoking articles provide readers with a clear picture of the latest developments and trends in the market. His passionate approach allows him to break down complex ideas into accessible and insightful content. Follow up on his content to be up to date with the most important trends and topics - stay ahead of the curve with CoinsPress.
