China's central bank steps in to slow its rapidly weakening currency, as yuan hits one-year lows

cnbc.com:

BEIJING — The Chinese yuan strengthened slightly against the U.S. dollar on Wednesday, reversing a sharp weakening trend after the People's Bank of China signaled support for its currency.

The yuan has tumbled by about 3% this month as the U.S. dollar strengthened, according to Wind Information. Prolonged Covid controls and worries about Chinese economic growth have also weakened sentiment on the yuan.

On Monday, the PBOC announced it would cut the deposits by 1 percentage point to 8%, effective May 15. The move reduces the amount of foreign currency that banks need to hold, theoretically reducing the amount of weakening pressure on the yuan.

«This move serves as a strong policy signal [the] PBOC is getting uncomfortable with the rapid depreciation of the currency,» Goldman Sachs analyst Maggie Wei and a team said in a report Monday.

The analysts pointed out that last year, the Chinese central bank increased the same foreign currency reserve ratio twice to slow rapid strengthening in the yuan.

«Looking forward, we expect this RRR cut to slow down CNY depreciation in the near term, though it would also depend on the broad USD path and overall sentiment toward Chinese growth,» the analysts said. «Uncertainties are still high with Shanghai facing protracted lockdown and new local Covid cases rising in Beijing.»

On Wednesday, the PBOC set the yuan midpoint at 6.5598 versus the dollar, the weakest fix since April 2021, according to FactSet data.

The U.S. dollar has strengthened since the Federal Reserve embarked on a cycle of monetary policy tightening and interest rates hikes. The U.S. 10-year Treasury yield has climbed to over three-year highs, erasing a premium the Chinese 10-year government bond yield once held.

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