The Chinese yuan fell to more than a three-month low on Tuesday morning after the central bank set the reference rate slighter lower and the market sees the currency remaining under pressure because of an expected US interest rate rise next month.
The onshore yuan in Shanghai traded at 6.5573 against the US dollar early on Tuesday morning, 0.06 per cent below its close on Monday. That is the lowest level since February 5. The currency later strengthened to 6.5526 by 10.45 am.
The onshore yuan has weakened by 1.21 per cent this month against the US dollar and is down by 0.92 per cent this year.
Jasper Lo, chief executive of King International, said the recent weak economic data on the mainland and the strengthening of the US dollar has caused the yuan to weaken.
“It is not a surprise to see the yuan fall against the US dollar and go further down as mainland economic data in April was not good. In addition, it appears it is highly likely the US will increase the interest rate in June. These have all added pressure to the yuan,” Lo said.
An official of the US Federal Reserve — central bank to the world’s largest economy — on Monday indicated the country would increase interest rates two to three times this year. That has sent both the US and Hong Kong stock markets lower.
Lo expected the yuan to continue to weaken in the second half of this year.
“The People’s Bank of China could still intervene if the yuan falls too sharply because the central bank will not like to see a chaotic situation. If there are speculators attacking the yuan, the PBOC will still take action to defend the currency. However, if it is only gradually falling, then the central bank is unlikely to act,” he said.
The People’s Bank of China, the country’s central bank, set the yuan reference rate slightly weaker at 6.5468 against the US dollar, down by 13 basis points compared with Monday.
The offshore yuan in Hong Kong also weakened to trade at 6.5690 per dollar in early trade, down 0.13 per cent from Monday. The currency rebounded to 6.5616 at 10.45 am. The offshore yuan traded at 6.5830 on May 18, the lowest since February 5. The currency has dropped 1.18 per cent this month.
The spreads between the onshore and offshore yuan shrank to 9 basis points as of 10.45am on Tuesday morning, compared with 130 basis points on Monday after widening over 300 points earlier this month.