Yuan slides to a 3-month low as rate cuts fuel China growth worries



SHANGHAI, Aug 16 (Reuters) - The yuan weakened to a three-month low against the dollar on Tuesday, as surprise rate cuts by China in the wake of weak data increased concern about prospects for the country's economic growth.

The onshore yuan CNY=CFXS dropped as much as 0.47% to touch 6.7950 per dollar, the weakest level since May 16. It was changing hands at 6.7867 at midday.

"RMB sentiment was pretty fragile, as market participants perceived the PBOC's rate cut as a bearish signal for China growth outlook," wrote Ken Cheung, a strategist at Mizuho Bank.

Analysts also said the widening divergence with U.S. monetary policy and tensions over Taiwan have spurred traders to hedge China risks and could push the yuan lower.

In the offshore market, the yuan CNH=D3 was relatively stable on Tuesday after touching 6.80 for the first time in three months in the previous session.

The gap between offshore and onshore yuan was at its widest in three months, underlining how foreign investors are more bearish on the currency than traders in China, where market is more controlled by the government.

The People's Bank of China unexpectedly cut one-year and seven-day policy rates after July activity and credit data showed a sharp slowdown in an economy hit by COVID-19 outbreaks and property sector woes.

"We do not see any improvement in China's growth picture compared to May," said Cheung, who sees further downside for the yuan in the near term, adding the market could no longer have rock-solid expectations that "the worst is behind us".

"Elevated geopolitical risk and China-U.S. tensions could also harm capital inflow to China markets," he also said, predicting that "hedging China risks" would once again become a key market theme.

This view was echoed by MayBank analysts, who wrote in a note to clients: "We see a risk of yuan depreciation possibly gathering momentum on a lethal combination of deteriorating macro backdrop and geopolitical tensions ahead of key political events such as the (China) Party Congress and the US mid-term election."

The yuan market at 4:50AM GMT:

ONSHORE SPOT: Item

Current Previous Change PBOC midpoint

6.773

6.741

-0.47% CNY=SAEC

Spot yuan

6.7867 6.7755

-0.17% CNY=CFXS

Divergence from

0.20%

midpoint*

Spot change YTD

-6.36% Spot change since 2005

21.95% revaluation

Key indexes:

Item

Current

Previous Change

Thomson

0.0 Reuters/HKEX

CNH index

Dollar index

106.527

106.546 0.0

*Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. The People's Bank of China (PBOC) allows the exchange rate to rise or fall 2 percent from official midpoint rate it sets each morning.

OFFSHORE CNH MARKET Instrument

Current Difference

from onshore Offshore spot yuan

6.8016

-0.22% CNH= *

Offshore

6.7189

0.81% non-deliverable

forwards

CNY1YNDFOR= **

*Premium for offshore spot over onshore CNY=CFXS **Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. CNY=SAEC .


Reporting by Shanghai newsroom; Editing by Edwina Gibbs

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