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Yuan weakens on interest hike expectations

Reporter: Chen Tong 丨 CCTV.com

08-31-2016 01:02 BJT

Will the yuan continue to weaken against the US dollar as the US economy picks up its pace of recovery?

Fed Chair Janet Yellen hinted last Friday that the possibility of a US interest rate hike is on the rise due to an improved American jobs market. Experts say a weaker yuan is a natural reaction to expectations of a stronger dollar.

"The movement of USD/CNY fixing is largely market driven and it is sensitive to USD movement overnight. The yuan spot already had a very bullish session and closed at 6.600 during Asian hours last Friday following USD/CNY upward move. The USD index spiked to recent highs after a hawkish speech from Yellen last Friday night, hence the jump in USD/CNY fixing," said Veronica Gu, investment consultant, Treasury and Markets, DBS.

The USD Index climbed to 95.54 dollars on Monday, the highest in about two weeks. U.S. non-farm payrolls also saw a surprising increase in July -- 255,000, far above expectations. Experts expect that to continue to increase in August. On Tuesday, the Renminbi midpoint strengthened from Monday to 6.6812 yuan per dollar. But Gu says it's possible that the midpoint will weaken again after the August non-farm payroll is released on Friday.

"There is a chance that USD/CNY fixing and spot going higher as there could be another impetus for a higher USD at least in the lead up to non farm payroll night. In the medium term, the yuan faces depreciation pressure for sure, given that US Fed is preparing to raise rates while the rest of the world is easing. Market participants will be biased towards buying USD on dips on speculation that the upcoming US job figures will make a September Fed hike more likely," he said.

Analyses show that when the US dollar has strengthened recently, the People's Bank of China has concentrated on keeping the yuan stable against a larger basket of currencies that the bank uses as a reference index for the Chinese currency.

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