Key points

  • Chinese yuan has depreciated to its lowest levels since November.

  • Chinese authorities have allowed the yuan to weaken by fixing the midpoint for onshore yuan weaker.

  • Reports of bond buying by the Chinese central bank have also underpinned, as these could signal the start of quantitative easing.

  • Broader easing measures are still likely to be delayed until the Fed easing begins.

  • Chinese authorities are unlikely to let yuan weaken steeply with trade tensions rising.

  • But USDCNH has shifted to a higher trading band, and yuan's direction remains tilted towards that of weakness.

China’s economic pressures have continued to deepen, with the housing market struggling, and manufacturing falling short of expectations. The central bank policy stance has also remained accommodative, while most other central banks have been tightening policy.

Still, the yuan has not weakened significantly this year. The onshore yuan has weakened by just over 2% against the USD year-to-date, compared to an over 10% decline in the Japanese yen, a 7% decline in the Korean won and a 5% drop in the Taiwanese dollar.

This is because the central bank has maintained a firm grip on the yuan with its daily fixings. The central bank sets the onshore spot midpoint daily and allows it to trade within a +/- 2% range from that level. The offshore yuan (CNH) also closely follows the onshore yuan, although it has traded above the band for much of this year.

Chart

Today’s onshore spot midpoint fixing was the weakest since November, with the USDCNY midpoint at 7.1192. This might indicate that the People's Bank of China (PBoC) is willing to let the yuan weaken further to manage depreciation pressure. This has pushed onshore and offshore yuan to their weakest levels since November.

Reports of quantitative easing are also adding to the pressure, with reports suggesting the PBoC might buy its own bonds. However, Pan Gongsheng, the governor of the PBoC, dismissed the idea that this bond trading is a form of massive monetary easing, describing it instead as a liquidity management tool.

Chinese authorities are likely to remain cautious about sudden yuan weakness or devaluation to avoid being tagged as currency manipulators, especially as export restrictions from the US and Europe increase.

Still, market participants are positioned to weaken the yuan at the slightest sign of China expanding its easing measures or loosening its grip on fixings. The yuan's direction remains clear, although the pace of depreciation is likely to be measured. For now, the trading band for USDCNH has likely shifted higher.

USDCNH

Source: Bloomberg. Note: Past performance does not indicate future performance.

Read the original analysis: CNH: China authorities loosening their grip, but devaluation unlikely

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Recommended Content


Recommended Content

Editors’ Picks

EUR/USD stays near 1.0400 in thin holiday trading

EUR/USD stays near 1.0400 in thin holiday trading

EUR/USD trades with mild losses near 1.0400 on Tuesday. The expectation that the US Federal Reserve will deliver fewer rate cuts in 2025 provides some support for the US Dollar. Trading volumes are likely to remain low heading into the Christmas break.

EUR/USD News
GBP/USD struggles to find direction, holds steady near 1.2550

GBP/USD struggles to find direction, holds steady near 1.2550

GBP/USD consolidates in a range at around 1.2550 on Tuesday after closing in negative territory on Monday. The US Dollar preserves its strength and makes it difficult for the pair to gain traction as trading conditions thin out on Christmas Eve.

GBP/USD News
Gold holds above $2,600, bulls non-committed on hawkish Fed outlook

Gold holds above $2,600, bulls non-committed on hawkish Fed outlook

Gold trades in a narrow channel above $2,600 on Tuesday, albeit lacking strong follow-through buying. Geopolitical tensions and trade war fears lend support to the safe-haven XAU/USD, while the Fed’s hawkish shift acts as a tailwind for the USD and caps the precious metal.

Gold News
IRS says crypto staking should be taxed in response to lawsuit

IRS says crypto staking should be taxed in response to lawsuit

In a filing on Monday, the US International Revenue Service stated that the rewards gotten from staking cryptocurrencies should be taxed, responding to a lawsuit from couple Joshua and Jessica Jarrett.

Read more
2025 outlook: What is next for developed economies and currencies?

2025 outlook: What is next for developed economies and currencies?

As the door closes in 2024, and while the year feels like it has passed in the blink of an eye, a lot has happened. If I had to summarise it all in four words, it would be: ‘a year of surprises’.

Read more
Best Forex Brokers with Low Spreads

Best Forex Brokers with Low Spreads

VERIFIED Low spreads are crucial for reducing trading costs. Explore top Forex brokers offering competitive spreads and high leverage. Compare options for EUR/USD, GBP/USD, USD/JPY, and Gold.

Read More

Majors

Cryptocurrencies

Signatures