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Asia FX sinks, yuan near 1-yr low after rate cut misses expectations

Published 21/08/2023, 03:24 pm
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Investing.com -- Most Asian currencies fell on Monday, with China’s yuan leading losses after a smaller-than-expected cut from the People’s Bank, while anticipation of more U.S. monetary policy cues kept the dollar steady.

The yuan was among the worst performers for the day after the PBOC disappointed markets with cuts to the loan prime rate (LPR). The move raised questions over just how much headroom China has to keep loosening policy, amid worsening economic conditions.

Persistent concerns over higher U.S. rates also weighed on sentiment, ahead of the Jackson Hole Symposium later this week. The dollar steadied after strong gains in the prior week, while Treasury yields also retained most recent gains.

Chinese yuan near 1-year low after rate cut disappointment 

The yuan fell 0.4% on Monday and was trading just above its weakest level since August 2022. The currency also crossed the key 7.3 level to the dollar.

The PBOC cut its one-year LPR by 10 basis points (bps) to 3.45%, while the five-year LPR, which is used to determine mortgage rates, was left unchanged at 4.20%. Analysts expected a 15 bps cut on each count. 

Both LPRs were already at their weakest points in data stretching back to 2013. 

The move points to limited monetary support for the Chinese economy, as it struggles with a slowing post-COVID economic recovery. Given the lack of monetary support, investors are now calling on the government to roll out more targeted, fiscal measures. 

But analysts expect Beijing to hold off on any such measures, citing high levels of government debt. 

Still, any further deterioration in China’s economy bodes poorly for the yuan, which is already struggling with a widening gulf between local and U.S. interest rates. 

Concerns over China dented most Asian currencies. The Australian dollar and Japanese yen weakened slightly, and were both trading close to nine and 10-month lows. 

The South Korean won and Singapore dollar both shed 0.1%. 

The Thai baht was the sole outlier for the day, rising 0.7% even as data showed the Southeast Asian economy grew much lesser than expected in the second quarter. 

Dollar steady with Jackson Hole in focus 

The dollar index and dollar index futures rose slightly in Asian trade, sticking close to two-month highs.

Concerns over rising U.S. interest rates, following strong inflation and labor market data, had underpinned the dollar in recent weeks, while weighing on most Asian currencies.

The Federal Reserve also recently signaled that most policymakers supported higher interest rates, with analysts predicting a rate cut only by next year.

Markets are now awaiting any more cues on the U.S. economy from the Jackson Hole Symposium later this week, where Fed Chair Jerome Powell is also expected to talk. 

 

 

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