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China's yuan eased to a fresh seven-month low against the dollar on Tuesday and looked set for its sixth straight monthly decline in June, as the country's central bank continued to guide the official fixing weaker even as the greenback retreated overnight. The yuan has stayed within a whisker of the weak end of its daily official trading band over the past week as capital outflows into higher-yielding dollars and speculation the central bank is allowing it to depreciate weigh on sentiment.
The spot yuan dropped to a seven-month low of 7.2630 in morning trade on Tuesday, as traders took the day's weak fixing as a sign the central bank may allow the currency to slowly weaken even as the dollar loses steam. Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1225 per dollar, its weakest level since November, 1,362 pips firmer than a Reuters estimate.
The weaker fix suggests the PBOC may want to allow a bit more room for the yuan to weaken, Maybank analysts said in a note, adding it was a little strange to see a weaker fix because most currencies strengthened against the dollar overnight. The dollar index fell overnight to 105.44 from a high of 105.9 on Monday, as U.S Treasury yields dropped ahead of the release of U.S. personal consumption expenditures (PCE) inflation data expected this Friday.
The Chinese yuan is 2.2% weaker so far this year. It has been under pressure since early 2023 due to domestic woes around a moribund property sector and weak consumption. Falling yields have driven capital flows out of yuan and foreign investors have shied away from China's stock market. The offshore yuan could retest the 7.30 level against the dollar on Thursday's U.S. presidential debate, but the PBOC fix may be set stronger the following session to counter the yuan's weakness, analysts at Citi wrote in a note to clients. The offshore yuan was trading at 7.2839 as of 0246 GMT. The onshore yuan opened at 7.2605 per dollar and quickly weakened to 7.2629, the lowest level since Nov. 15, 2023. Based on Tuesday's official guidance, the yuan is allowed to weaken to as low as 7.2650. In overnight cash settlement transactions, the yuan was quoted at 7.2618 per dollar, implying it was just 32 pips from the weak end of the band in the overnight tenor. Markets will be watching economic data closely this week for a clearer picture of the currency outlook. In addition to the U.S. PCE index, the Fed's favoured gauge of inflation, China's May industrial profits are also due on Friday and its June manufacturing survey will be released on Sunday. Key onshore vs offshore levels: •Overnight dollar/yuan swap onshore -8.00 pips •Three-month SHIBOR 1.9 % vs. 3-month CNH HIBOR 3 % LEVELS AT 0246 GMT INSTRUMENT CURRENT UP/DOWN(- % CHANGE DAY'S DAY'S vs USD ) VS. YR-TO-DA HIGH LOW PREVIOUS TE CLOSE % Spot yuan 7.2629 -0.04 -2.22 7.2592 7.263