The sudden uptick in funding currencies, particularly yen and yuan, dented carry trades, after weak U.S. labour data late last week stoked recession worries and expectations of deeper rate cuts by the Federal Reserve.
“The U.S. data amplified the post-FOMC bond rally and generated a more classic risk on/risk off split: higher beta currencies and popular longs underperformed further, while popular funders rebounded – some sharply, including against the dollar,” analysts at Barclays said in a note.
They added that the yuan also gained some support from a hawkish Bank of Japan (BOJ) interest rate hike last week. Prior to the market opening, the People’s Bank of China (PBOC) set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1345 per dollar, 567 pips firmer than a Reuters’ estimate.
The official fixings have been set at firmer-than-expected levels for well over a year, a trend that traders say reflects Beijing’s desire to keep its currency stable. Ken Cheung, director of FX strategy at Mizuho Securities, does not expect much upside for the yuan from the current level due largely to weak domestic fundamentals. “The market is carefully gauging whether and when Chinese exporters will start offloading their huge amounts of dollar receipts,” said a trader at a Chinese bank. Chinese exporters have been unwilling to settle their FX receipts and have been piling them in dollar deposits in the past few years, encouraged by higher U.S. yields and wide gap with Chinese rates. Currency traders said once exporters start such dollar-to-yuan conversion, it will give the yuan a strong boost. The yuan is still down 0.5% against the dollar so far this year. It has been under pressure since early 2023 as domestic woes around a moribund property sector, anaemic consumption and falling yields drive capital flows out of yuan, and foreign investors stay away from its struggling stock market. Key onshore vs offshore levels: * Overnight dollar/yuan swap onshore -9.50 pips vs. offshore -9.50 * Three-month SHIBOR 1.8 % vs. 3-month CNH HIBOR 2.6 % LEVELS AT 0400 GMT INSTRUMENT CURRENT UP/DOWN(-) % CHANGE DAY’S HIGH DAY’S vs USD VS. PREVIOUS YR-TO-DATE LOW CLOSE % Spot yuan 7.1365 0.34 -0.48 7.115 7.1567