SHANGHAI (Reuters) – The Chinese yuan strengthened against a falling dollar on Friday, after swinging sharply between gains and losses, and was forecast for a weekly decline against the greenback, new data underscoring the challenges facing the country’s economy is facing.
The global dollar index extended its slide from a 20-year high this week, hitting a one-month low of 101.43 on Friday as traders reconsidered bets on aggressive tightening by the US Federal Reserve.
But the yuan’s gains have not kept pace as coronavirus lockdowns continue to hamper activity in the world’s second-largest economy.
Profits at China’s industrial companies fell at their fastest pace in two years in April, National Bureau of Statistics data showed on Friday, with high commodity prices and supply chain chaos caused by the COVID-19 squeezing margins and disrupting factory operations.
Traders said market worries about lack of domestic economic momentum would keep the yuan under pressure, but divisive investor sentiment was adding to exchange rate volatility.
“Overseas, the feeling is that the Chinese economy is weak. The offshore yuan is biased lower and that is weighing on the onshore yuan,” said a trader at a Chinese bank. “Right now the yuan is swinging back and forth too much, and even if you’re well positioned, you’re not necessarily making money.”
On Friday, the People’s Bank of China (PBOC) set the daily midpoint for the yuan at 6.7387 per dollar, its lowest in a week.
The onshore spot yuan opened at 6.7600 per dollar, its weakest point of the day before firming nearly 400 pips to 6.7205. By midday, its gains had moderated and it was changing hands at 6.7365 to the dollar, just 14 pips higher than Thursday’s late session close.
The offshore yuan strengthened to 6.756 to the dollar.
Raymond Yeung, chief Greater China economist at ANZ, said China’s lockdowns have been a major contributing factor to recent weakness in global equities and currency volatility, with recent large monthly outflows of yuan bonds pushing the currency down further.
This may continue despite Chinese President Xi Jinping’s insistence on maintaining the country’s strict zero COVID policy.
“Even with a small number of cases…authorities may call for high-intensity restrictions that will curb economic activities, posing major political uncertainty in the region,” he said in a note.