China's yuan weakens to near 28-month low, set for worst week since May



SHANGHAI, Sept 23 (Reuters) - China's yuan weakened to a near 28-month low on Friday and looked set for its biggest weekly loss in four months, as a widening yield differential between the world's two largest economies continued to weigh on the Chinese currency.

The greenback =USD strengthened in global markets, with benchmark U.S. Treasury yields US10YT=RR hitting an 11-year high overnight, as investors positioned for more Federal Reserve interest rate hikes to tame high inflation after its latest hike this week.

"The growth differential as well as the Fed-PBoC divergence could continue to keep the USD/CNH on the upswing," analysts at Maybank said in a note.

The yield gap between the benchmark 10-year U.S. Treasury bond and its Chinese counterpart CN10YT=RR now stands at 103.7 basis points, the highest since 2007.

China, along with Japan, is among major outliers in a global run of interest rate hikes, but the widening policy divergence has hurt their currencies.

Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate CNY=PBOC at 6.9920 per dollar, 122 pips or 0.17% weaker than the previous fix 6.9798, the weakest since Aug. 3, 2020.

But the central bank continued to set the official guidance rate firmer than market projections for the 22nd straight trading day, a move that market interpreted as an effort to slow the yuan's slides. Friday's midpoint was 160 pips stronger than Reuters' estimate of 7.0080.

Some market participants said the central bank's firmer-than-expected midpoint fixings have limited the downside room as the onshore yuan is only allowed to trade in a narrow range of 2% around the daily guidance.

Friday's fixing level would allow a trading range of between 6.8522 and 7.1318.

In the spot market, the onshore yuan CNY=CFXS opened at 7.0820 per dollar and weakened past the key 7.1 per dollar to trade at 7.1007 by midday, 217 pips or 0.3% weaker than the previous late session close.

The midday level was only about 0.4% away from the lower end of the trading band. If the onshore yuan finishes the late night session at the midday level, it would book the sixth straight weekly loss to drop 1.8% to the dollar.

Its offshore counterpart CNH=D3 fell to 7.1079 per dollar by midday.

Traders said investors continued to digest a string of global central bank decisions to raise interest rates following the Fed's aggressive 75-basis-point hike on Wednesday.

"Corporate dollar buying remained strong in morning deals to drag the yuan lower," said a trader at a Chinese bank.

Citi analysts said in a note that market tended to be cautious about a counter-cyclical policy response from authorities as importers' FX conversion ratio continued to rise.

Separately, some economists pointed out room for China's monetary easing to prop a slowing economy has been restrained by the hawkish Fed.

"The U.S. Fed has now vowed to bring inflation down with aggressive rate hikes, adding significant downside risks to global demand and China's exports, while limiting Beijing's space for policy easing," said Ting Lu, chief China economist at Nomura, cutting his forecast for China's annual GDP growth in 2023 to 4.3% from 5.1% previously.

The yuan market at 0401 GMT:

ONSHORE SPOT: Item

Current Previous Change PBOC midpoint

6.992

6.9798

-0.17% CNY=SAEC

Spot yuan

7.1007 7.079

-0.31% CNY=CFXS

Divergence from

1.55%

midpoint*

Spot change YTD

-10.50% Spot change since 2005

16.56% revaluation

Key indexes: Item

Current

Previous Change

Thomson

0.0 Reuters/HKEX

CNH index

Dollar index

111.406

111.353 0.1 *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

7.1079

-0.10% CNH= *

Offshore

6.9804

0.17% 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 Kim Coghill

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