China's yuan touches nine-day low as more pressure seen on yield gap

China's yuan touched its lowest level in more than a week against the US dollar as a narrowing yield gap and traders' concerns over the impact of the Ukraine crisis weighed

China's yuan touched its lowest level in more than a week against the U.S. dollar on Thursday as a narrowing yield gap and traders' concerns over the impact of the Ukraine crisis weighed.

The spread between the benchmark Chinese and U.S. 10-year yields has narrowed this week to as little as 35.5 basis points, its narrowest since March 2019, as predictions of U.S. policy tightening have come up against expectations that China will implement more loosening to bolster a slowing economy.

While the spread widened to around 48 basis points on Thursday, it remained near levels last seen in March 2019 levels and still within what Tao Chuan, chief macro analyst at Dongwu Securities, said was an "uncomfortable" range.

Pressure on the spread and the Chinese currency could rise further after Federal Reserve policymakers signaled readiness to take more aggressive action to bring down unacceptably high inflation, including a possible half-percentage-point interest rate hike at the next policy meeting in May.

"The Fed may aggressively raise rates, so the market's willingness to hold dollars will strengthen and we may see more dollar buying," said a trader at a Chinese bank.

"Of course we also see room for the dollar to strengthen." At the same time, Dongwu's Tao said with the market having already digested expectations of a 50 basis point hike by the Fed, further spikes in the U.S. 10-year yield were unlikely unless the Fed moved even more aggressively.

Before the market open on Thursday, the People's Bank of China set the yuan's daily midpoint rate at 6.364 per dollar prior, weaker than Wednesday's fix of 6.3558.

Spot yuan opened at 6.3772 per dollar and weakened to 6.3780 in early trade, its softest against the dollar since Mar. 15. By midday it had recovered to change hands at 6.3725, just 8 pips stronger than Wednesday's late session close.

The offshore yuan also touched a nine-day low before recovering to 6.3862 per dollar by midday, as the global dollar index rose to 98.788 from the previous close of 98.622.

In addition to expectations of Fed tightening, the dollar has been helped by safe-haven flows amid global uncertainty over the impact of the Ukraine crisis.

The United States is planning to announce more sanctions on Russian political figures and oligarchs on Thursday, after President Joe Biden arrived in Brussels for a meeting of NATO, the G7 and the European Union over the month-old Ukraine conflict.

The U.S. Commerce Secretary said that the United States would "absolutely" enforce export controls if Chinese firms violate export controls on Russia.

The yuan market at 4:00AM GMT:

ONSHORE SPOT:

Item Current Previous Change PBOC midpoint 6.364 6.3558 -0.13%

Spot yuan 6.3725 6.3733 0.01%

Divergence from 0.13%

midpoint*

Spot change YTD -0.27% Spot change since 2005 29.88% revaluation

Key indexes:

Item Current Previous Change

Thomson 104.52 104.61 -0.1 Reuters/HKEX

CNH index

Dollar index 98.788 98.622 0.2

*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 6.3862 -0.21%

*

Offshore 6.48 -1.79%

non-deliverable

forwards

**

*Premium for offshore spot over onshore

**Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint.

(Reporting by Andrew Galbraith in Shanghai and Xiao Han in Beijing; Editing by Sam Holmes)