China's yuan eases against the dollar on widening yield differential

China's yuan eases against the dollar on widening yield differential

The yield gap between China’s 10-year government bonds and its U.S. counterparts has widened by 24 basis points (bps) since Dec. 27 to 144 bps, with the market repricing the U.S. Federal Reserve’s policy easing and expectations for rate cuts in China continuing to build.

The yield on actively traded 10-year China government bonds touched the lowest point since April 2020 on Friday.

The ongoing divergence in the balance sheet policies of the Fed versus the People’s Bank of China (PBOC) is a significant short-term headwind for the offshore yuan, traders at Citi said, adding that they expect further interest rate cuts and additional loan injections via China’s pledged supplementary lending (PSL) facility.

China’s central bank made 350 billion yuan ($48.83 billion)in loans to policy banks through its PSL facility in December, fuelling expectations of increased support for the country’s ailing housing sector.

“However, we expect onshore exporter USD holdings, which look abnormally large this year, to be converted to the yuan ahead of the Lunar New Year, which should drive the yuan stronger against the dollar towards the end of January or the first week of February,” the traders said.

Prior to the market’s opening, the PBOC set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1029 per U.S. dollar, 33 pips weaker than the previous fix 7.0997.

The spot yuan opened at 7.1675 per dollar and was changing hands at 7.1684 at midday, 64 pips weaker than the previous late session close.

The global dollar index rose to 102.457 from the previous close of 102.422.

Investors are watching U.S. payrolls data later in the day to gauge the Fed’s policy path, which could also affect the yuan-dollar pair.

The offshore yuan was trading 99 pips weaker than the onshore spot at 7.1783 per dollar.

The yuan market at 0333 GMT:


Item Current Previous Change

PBOC midpoint 7.1029 7.0997 -0.05%

Spot yuan 7.1684 7.162 -0.09%

Divergence from 0.92%


Spot change YTD -0.98%

Spot change since 2005 15.46%


Key indexes:

Item Current Previous Change

Thomson 0.0


CNH index

Dollar index 102.457 102.422 0.0

*Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. The People’s Bank of China (PBOC) allows the exchange rate to rise or fall 2% from official midpoint rate it sets each morning.


Instrument Current Difference

from onshore

Offshore spot yuan * 7.1783 -0.14%

Offshore 6.991 1.60%


forwards **

*Premium for offshore spot over onshore

**Figure reflects difference from PBOC’s official midpoint, since non-deliverable forwards are settled against the midpoint..

($1 = 7.1677 Chinese yuan renminbi)

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