China's yuan hits 27-month low as dollar buoyed by hawkish Fed



SHANGHAI, Sept 22 (Reuters) - China's yuan fell to a 27-month low against a surging dollar on Thursday after the U.S. Federal Reserve delivered another 75 basis-point interest rate rise and signalled more hikes in coming months.

Fed Chair Jerome Powell vowed on Wednesday that he and his fellow policymakers would "keep at" their battle to beat down inflation. In a sobering new set of projections, the Fed foresees its policy rate rising at a faster pace and to a higher level than expected.

The Fed's more hawkish stance than many market participants had anticipated pushed the dollar to a fresh two-decade high and put pressure on emerging market currencies.

Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate CNY=PBOC at 6.9798 per dollar, 262 pips or 0.38% weaker than the previous fix of 6.9536, the softest since Aug. 4, 2020.

But the official guidance came in much stronger than market projections for a 21st straight trading day, traders and analysts said, noting this was part of an official attempt to stem fast yuan declines. Thursday's midpoint was 148 pips firmer than Reuters' estimate of 6.9946.

"The dollar was too strong," said Ken Cheung, chief Asian FX strategist at Mizuho Bank.

"This round of yuan depreciation was triggered by the buoyant dollar, and the midpoint fixing should remain the key tool (to stabilise the market)."

In the spot market, the onshore yuan CNY=CFXS opened at 7.0801 per dollar and fell a low of 7.0954, the weakest level since June 17, 2020. It traded at 7.0891 by midday, 414 pips softer than the previous late session close.

Its offshore counterpart CNH=D3 breached the key 7.1 per dollar level before trading at 7.0977 per dollar around midday.

"The PBOC is likely to continue to lean against the move (in USD/CNY) higher, but is unlikely to try to stabilise USD/CNY if the broad USD continues to gain," Lemon Zhang, FX strategist at Barclays, said in a note.

"Going forward, we expect the PBOC to adopt more counter-cyclical policy choices from its toolkit, especially ahead of the Party Congress on October 16, such as further FX reserve requirement ratio (RRR) cuts and stronger CNY bias in the daily fixing."

Zhang expects the yuan to hit 7.15 by the fourth quarter of this year.

China lowered the FX RRR earlier this month to slow the pace of yuan losses, and investors widely expect the authorities to roll out more policy measures should the weakness be sustained.

Some currency traders said the 7.1 per dollar level should continue to offer strong resistance to the onshore market, as it was not far from the lower end of the daily trading band of 7.1194.

China's onshore yuan can only trade in a narrow range of 2% around the daily midpoint fixing, and Thursday's guidance rate capped the range to between 6.8402 and 7.1194.

"The hard defense line could be around 7.18 per dollar for this round of depreciation," said a trader at a foreign bank.

The trader said the level was last hit during the height of Sino-U.S. trade tensions in 2019 and has also acted as a floor for the yuan since the global financial crisis of 2008.

The yuan market at 0400 GMT:

ONSHORE SPOT: Item

Current Previous Change PBOC midpoint

6.9798 6.9536

-0.38% CNY=SAEC

Spot yuan

7.0891 7.0477

-0.58% CNY=CFXS

Divergence from

1.57%

midpoint*

Spot change YTD

-10.36% Spot change since 2005

16.75% revaluation

Key indexes: Item

Current

Previous Change

Thomson

0.0 Reuters/HKEX

CNH index

Dollar index

111.614

110.642 0.9 *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

7.0977

-0.12% CNH= *

Offshore

6.9703

0.14% 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 Winni Zhou and Brenda Goh; Editing by Ana Nicolaci da Costa and Richard Pullin

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