Chinese yuan hits 27-month low as dollar backed by hawkish Fed

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(Adds details, commentary and chart, updates midday prices) SHANGHAI, Sept 22 (Reuters) – The Chinese yuan fell to its lowest level in 27 months on Thursday against a rising dollar after the Reserve The US federal government announced another 75 basis point interest rate hike and signaled more hikes in the coming months. Fed Chairman Jerome Powell promised on Wednesday that he and his fellow policymakers would “continue” their fight to fight inflation. In a new set of sobering projections, the Fed expects its key rate to rise at a faster pace and higher than expected. The Fed’s more hawkish stance than many market participants expected pushed the dollar to a new two-decade high and put pressure on emerging market currencies. Ahead of the market open, the People’s Bank of China (PBOC) pegged the midpoint rate at 6.9798 per dollar, 262 pips or 0.38% lower than the previous patch of 6.9536, the weakest since on Aug. 4, 2020. But official guidance came in much stronger than market projections for a 21st consecutive trading day, traders and analysts said, noting it was part of an official bid to stem the decline yuan fast. Thursday’s midpoint was 148 pips firmer than Reuters’ estimate of 6.9946. “The dollar was too strong,” said Ken Cheung, chief Asian currency strategist at Mizuho Bank. “This cycle of yuan depreciation was triggered by the strength of the dollar, and fixing the midpoint should remain the key tool (to stabilize the market).” In the spot market, the onshore yuan opened at 7.0801 per dollar and fell to a low of 7.0954, the lowest level since June 17, 2020. It was trading at 7.0891 at noon , 414 pips lower than the previous late session close. Its offshore counterpart broke the key 7.1 per dollar level before trading at 7.0977 per dollar around noon. “The PBOC will likely continue to oppose (USD/CNY) upside, but it is unlikely to attempt to stabilize USD/CNY if the broader USD continues to gain,” he said. said Lemon Zhang, FX strategist at Barclays, in a statement. Remark. “Going forward, we expect the PBOC to adopt more countercyclical policy choices from its toolkit, particularly ahead of the Party Congress on October 16, such as further reductions in the reserve requirement ratio of (RRR) and a 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 authorities to deploy more policy measures if the weakness continues. Some forex traders said the 7.1 per dollar level should continue to provide strong resistance to the onshore market as it was not far from the lower end of the daily trading band at 7.1194. China’s onshore yuan can only trade within a narrow 2% range around the daily median fixation, and Thursday’s guidance rate capped the range between 6.8402 and 7.1194. “The hard line of defense could be around 7.18 to the dollar for this round of depreciation,” said a foreign bank trader. The trader said the level was last seen at the peak of the Sino-U.S. trade tensions in 2019 and also served as a floor for the yuan since the 2008 global financial crisis. The yuan market at 04:00 GMT: ONSHORE SPOT: Item Current Previous PBOC Midpoint Change 6.9798 6.9536 -0.38% Spot Yuan 7.0891 7.0477 -0.58% Divergence from midpoint of 1.57%* Spot change YTD -10.36% Spot change since 2005 16.75% revaluation 111.614 110.642 0.9 *Divergence of dollar/yuan exchange rate. A negative number indicates that the spot yuan is trading stronger than the midpoint. The People’s Bank of China (PBOC) allows the exchange rate to rise or fall by 2% from the official midpoint rate it sets each morning. OFFSHORE CNH MARKET Instrument Current Difference from onshore Offshore spot yuan 7.0977 -0.12% * Offshore 6.9703 0.14% undeliverable forward ** *Premium for offshore spot over onshore **The figure reflects the difference from the official PBOC midpoint, as non-deliverable futures contracts are settled against the midpoint. . (Reporting by Winni Zhou and Brenda Goh; Editing by Ana Nicolaci da Costa and Richard Pullin)

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