On the inaugural trading day of 2024, China’s yuan faced a decline against the US dollar, driven by escalating speculations of monetary easing. The backdrop for this move is set by recent factory activity data, revealing a third consecutive monthly contraction in China’s manufacturing sector in December, portraying the uneven nature of the recovery in the world’s second-largest economy.
Official figures indicated a more substantial weakening than anticipated, while a private survey simultaneously highlighted an expansion at a faster pace. Analysts at Capital Economics foresee ongoing policy support, stating that the Central Economic Work Conference’s indications in early December suggest forthcoming fiscal support and additional monetary easing measures.
The recent reduction in deposit rates by major commercial banks is seen as a precursor to potential lending rate cuts. Capital Economics anticipates 20 basis points of policy rate cuts and another reserve requirement ratio (RRR) reduction in the first half of 2024.
Ahead of the market opening, the People’s Bank of China (PBOC) set the midpoint rate at 7.0770 per dollar, slightly stronger than the previous fix. The central bank’s trend of setting official guidance rates firmer than market projections in 2023 persisted, reflecting efforts to maintain stability in the yuan.
In the spot market, the onshore yuan commenced at 7.1072 per dollar, later trading at 7.1262 at midday—experiencing a 284-pip weakening compared to the previous late session close. The yuan concluded 2023 with a 2.8% depreciation against the dollar for the second consecutive yearly decline.
With the US Federal Reserve hinting at potential interest rate cuts, analysts anticipate a narrowing of yield differentials between the US and China, alleviating some downward pressure on the yuan in 2024. Markets currently imply an 86% chance of Fed rate cuts starting from March, with expectations of over 150 basis points of easing throughout the year.
As the global economic landscape evolves, attention remains on how China will navigate policy measures to foster stability and sustained growth.
