China’s yuan weakens as fall in factory prices clouds recovery picture

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HONG KONG — China’s yuan weakened on

Friday after data showed factory gate prices fell more than

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expected in January, suggesting manufacturers are not yet

running at full speed even after the scrapping of tough COVID

measures late last year.

While analysts believe China’s economy should rebound this

year, investors are eager for more evidence that it is on a

strong and substainable recovery trajectory after 2022’s

pandemic-induced slump.

Consumer inflation did pick up last month, helped by the

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country’s reopening and pent-up demand.

Still, factory gate prices reflected by the producer price

index (PPI) fell more than economists expected, down 0.8%

year-on-year. Such a drop was unexpected after earlier data

showed economic activity had returned to growth in

January.

“Taken together, the inflation environment remains benign

enough for the People’s Bank of China to ease monetary policy

conditions a tad more to give the economy much-needed support,”

said analysts at Maybank in a research note on Friday.

Spot yuan opened at 6.7880 per dollar and was

changing hands at 6.7996 at midday, 146 pips weaker than the

previous late session close and 0.16% away from the midpoint.

It looked set to end the week little changed, though it has

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gained around 1.7% so far this year on economic recovery hopes

and a generally softer U.S. dollar.

The People’s Bank of China set the midpoint rate

at 6.7884 per U.S. dollar prior to market open, firmer than the

previous fix 6.7905. The spot rate is currently allowed to trade

with a range 2% above or below the official fixing on any given

day.

China is expected to release January credit data in coming

days. Analysts polled by Reuters expect bank loans likely surged

to a record high in January as the central bank moved to shore

up growth and set the stage for a solid recovery.

Some analysts also are expecting more RRR cuts from the PBOC

this year. The PBOC bank last cut its reserve requirement ratio

(RRR), or the amount that cash that banks must hold as reserves,

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by 25 basis point to 7.8% in December.

“Trading will likely remain range bound early next week as

the market is awaiting U.S. CPI data due on February 14, which

will inform the Federal Reserve on whether it needs to continue

with interest rate hike beyond March,” said Kirk Wong, global

market and FX strategist at Everbright Securities International.

The market is expecting another quarter percentage point

hike in the U.S. in March after the Fed raised its benchmark

rates by 25 basis points to 4.5%-4.75% last week.

The global dollar index rose to 103.348 from the

previous close of 103.221.

The offshore yuan was trading -0.12% away from the

onshore spot at 6.8079 per dollar.

The one-year forward value for the offshore yuan

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traded at 6.6442 per dollar, indicating a roughly 2.46%

appreciation within 12 months.

The yuan market at 3:31AM GMT:

ONSHORE SPOT:

Item Current Previous Change

PBOC midpoint

0.03%

6.7884 6.7905

Spot yuan

6.785 -0.21%

6.7996

Divergence from

midpoint*

0.16%

Spot change YTD

1.48%

Spot change since 2005

revaluation 21.72%

OFFSHORE CNH MARKET

Instrument Current Difference

from onshore

Offshore spot yuan

* -0.12%

6.8079

Offshore

non-deliverable 2.08%

forwards 6.6501

**

*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 Kim Coghill)