China's yuan weakens as falling factory gate prices point to fading recovery

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By Georgina Lee

HONG KONG, June 9 (Reuters) -The yuan weakened while trading in a narrow range on Friday, after a worse-than-expected drop in factory gate prices fueled investors' concerns about China's fragile economic recovery and speculation that interest rates could be cut.

As faltering demand weighed manufacturing, China's factory gate prices fell by 4.6% in May, making the steepest decline in seven years.

The consumer price index rose 0.2% year-on-year, missing a forecast for a 0.3% increase. The downbeat data fueled calls for more policy support to bolster the economy.

Speculation that China's central bank would cut interest rates has mounted over the past week, after six state-owned banks cut their deposit rates under the policymakers' guidance.

The spot yuan CNY=CFXS opened at 7.1140 per dollar and was changing hands at 7.1192 at midday, 72 pips weaker than the previous late session close and 0.11% weaker than the midpoint.

The People's Bank of China set the midpoint rate CNY=PBOC at 7.1115 per dollar prior to the market open, firmer than the previous fix of 7.128. The spot rate is currently allowed to trade with a range 2% above or below the official fixing on any given day.

A rate cut may not solve the core problem in China, which lies with households' demand for credit, according to Alvin Tan, head of Asia currency strategy at RBC Capital Markets.

"Chinese households are under pressure from the troubled property sector, as property is still the biggest asset for many households," Tan said.

Three years of living with the COVID pandemic had a impact on how households spend on larger value purchases, with Chinese households preferring to save up for rainy days, said Shao Yuting, a macro strategist for State Street.

She expects there would be stimulus measures to be announced in China's politburo meeting in July.

"There is immense concerns for the country’s economy especially given there appears to limited sources of growth," said Maybank in a research note on Friday.

The global dollar index .DXY rose to 103.399 from the previous close of 103.343.

All eyes will be watching U.S. inflation data due for release on June 13, the first day of the Federal Reserve policy meeting next week. Money markets have priced in a 25% chance that the U.S. central bank hikes rates by 25 basis points.

The offshore yuan CNH=D3 was trading -0.16% away from the onshore spot at 7.1303 per dollar.

The one-year forward value for the offshore yuan CNH1YOR= traded at 6.9262 per dollar, indicating a roughly 2.95% appreciation within 12 months.

The yuan market at 3:14AM GMT:






PBOC midpoint CNY=SAEC




Spot yuan CNY=CFXS




Divergence from midpoint*


Spot change YTD


Spot change since 2005 revaluation





Difference from onshore

Offshore spot yuan CNH= *



Offshore 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 Georgina Lee; Editing by Simon Cameron-Moore


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