China’s yuan depreciated to a four-month low against the dollar on Friday, breaching a significant threshold and prompting intervention from state-owned banks to support the currency.
In the spot market, the onshore yuan dropped below the psychologically important level of 7.2 per dollar, reaching a low of 7.24, its weakest since November 17, 2023.
According to market sources speaking to Reuters, state banks intervened by purchasing yuan with dollars after it breached the 7.2 level. By 0240 GMT, the yuan had stabilized at 7.224, closer to its opening level.
These sources, who requested anonymity due to lack of authorization to speak publicly about market trades, revealed the intervention details.
The yuan has experienced a decline of over 2% in the past three months, influenced by increasing market expectations of additional monetary easing measures to support China’s economy, the world’s second-largest.
Before the market opened, the People’s Bank of China (PBOC) set the midpoint rate, around which the yuan trades within a 2% band, at 7.1004 per dollar, 62 pips weaker than the previous fixing of 7.0942.
Traders noted that the PBOC had consistently set the midpoint rate at levels stronger than market forecasts for months. Friday’s midpoint was 1,143 pips firmer than a estimate of 7.2147, marking the largest discrepancy since November.
Meanwhile, the offshore yuan continued to depreciate, hitting a more than four-month low of 7.2525 against the dollar.
The sudden weakness in the yuan also impacted stock markets, with the benchmark Shanghai stock index declining by 1.4%.
Traders attributed the yuan’s sudden weakness to increasing expectations of monetary easing after senior PBOC officials hinted at the possibility of further reducing bank reserve requirements to support the economy.
China’s central bank emphasized having room to further cut banks’ reserve requirement ratio (RRR), among other policy tools, underscoring market expectations for additional easing measures.
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