Offshore Yuan Falls Below 7.3 as Yen Hits New Low

On June 26,at approximately 18:15 Beijing time,the offshore RMB breached the 7.3 mark against the US dollar,marking a new low not seen since November last year.The weakening of the yuan has been a persistent trend over the past fortnight,coinciding with a resurgence of the strong dollar,which has put immense pressure on Asian currencies.Notably,the Japanese yen plunged beyond the 160 threshold against the dollar on the same day,setting a new historical low.Such movements in currency values have significant implications on trade balances and economic strategies in the respective countries.

According to Wang Ju,the head of currency and interest rate strategy for Greater China at BNP Paribas,despite the central bank's ongoing efforts to maintain currency stability,the yuan is likely to face pressure in the third quarter due to several factors.These include the upcoming dividend season,tariff risks,and relatively high interest rate differentials between China and the US.The delicate balance of maintaining currency stability while navigating these external pressures illustrates the challenges that policymakers face in an increasingly interconnected global economy.

In a more short-term context,traders are keenly focused on the anticipated PCE (Personal Consumption Expenditures) data set to be released this week.The PCE is widely regarded as the Federal Reserve's preferred measure of inflation.A decrease in this figure would likely ease some of the pressure on Asian currencies,offering a glimmer of hope amid the tumult in exchange rates.

When examining the recent performance of the yuan,it is evident that seasonal factors have played into its depreciation.Over the past week (June 17-21),the yuan displayed a general trend of weakness,culminating in a 0.09% depreciation by the week's end.On June 20,the offshore market experienced a notable drop,which in turn affected the onshore market.Such synchronized movements underscore how closely intertwined the offshore and onshore markets are,with shifts in one often reverberating across the other.

The continued weakness of Asian currencies has been a focal point for traders in the week,especially with the yen's plunge and anticipation surrounding the PCE data.Wang Ju attributes the recent weakness of the yuan to several factors,including mixed signals from high-frequency economic indicators,weak credit demand in May,and the continued incremental rise in the central bank's midpoint exchange rate,which recently crossed the 7.12 mark.There is an expectation that the central bank will manage the depreciation of the yuan in a measured and cautious manner.

Regarding economic indicators,there has been a softening in the economic cycle metrics for May compared to April.The social financing figures in May,which saw a reversal from negative growth to an increase of 2.06 trillion yuan,were primarily driven by government bond issuances.This dynamic,with government bonds accounting for 59.2% of the increase in social financing,highlights how current economic growth is largely reliant on government expenditure rather than robust private sector activity.The demand side remains sluggish,particularly in real estate and durable goods,indicating the ongoing challenges facing the Chinese economy.

Despite these challenges,there are some positive signals for the yuan to note.Since May,the current account has turned positive,with exports emerging as a strong growth driver,supported by rising productivity levels.In May,while the outflow pressure on foreign direct investment (FDI) only slightly alleviated,there was a notable year-on-year increase of 9%,alongside a 25% increase in outward direct investment (ODI).This reflects the continued internationalization of the renminbi and highlights China's aspiration to enhance its influence in global trade.

Wang Ju also highlights that robust export inflows contribute positively to currency stability.However,investors are warned about potential capital outflows linked to the seasonal dividend period in summer.The ongoing higher interest rate differentials between China and the US have led some exporters to hold onto dollars instead of converting them,further complicating the currency landscape.

Central bank intervention is a critical component in ensuring market stability,particularly in the current environment.Wang Ju posits that while the central bank has exhibited some adjustments in its approach—such as shifting parts of its onshore forward intervention to the offshore market—the fundamental strategy of maintaining stability will persist.This nuanced adjustment is reflective of the complexities inherent in managing currency fluctuations in a globalized economy.

Short-term market dynamics are likely to be heavily influenced by the upcoming PCE data release.The strength of the dollar,driven by a series of extreme events,could face a reversal depending on the economic figures that emerge.According to veteran strategist David Scutt at StoneX,he expresses skepticism regarding the sustainability of the dollar index's upward movement,casting doubt on its recent performance driven by a stronger-than-expected US composite PMI.

With the PCE data expected to show a significant easing of inflationary pressures compared to earlier this year,there is an increasing risk that the Fed may adjust its rate-cutting expectations.Market sentiment around the euro has also turned overly pessimistic,contributing to the dollar's recent traction.The essential nature of maintaining a delicate balance between economic indicators and currency fluctuations continues to play a crucial role in shaping investor expectations.

The upcoming PCE data release at 20:30 Beijing time is anticipated to show both the overall and core PCE figures decreasing to 2.6%,down from 2.7% and 2.8% respectively.Fed officials have expressed mixed views on future rate cuts,with some advocating a cautious approach while the market speculates on the timing and number of possible cuts this year.

Amid considerations of political uncertainties in Europe and concerns regarding the economic outlook,the euro/dollar exchange rate remains under pressure,impacting the broader dollar index.Recent figures indicating a decline in German business confidence have fueled fears that economic recovery might lose momentum.According to Scutt,in the short term,the upward trend of the dollar index appears to be losing steam,and if the dollar weakens further,it could provide a lift for currencies like the yen and the yuan.

Given the recent patterns,monitoring the relationship between the offshore yuan and other currency pairs becomes crucial,particularly its interplay with the dollar/yen.The strong correlations observed in the past month highlight the importance of understanding the broader context of currency movements in response to fluctuating economic indicators and sentiment shifts among market participants.