The Chinese yuan weakened against several of its major currency counterparts to kick off the trading week as the People’s Bank of China (PBoC) pumped approximately $16 billion in liquidity into the financial system. Since its enormous rally against the US dollar, the yuan has cooled down, driven by uncertainty surrounding China’s economic recovery. Will the yuan continue to trend sideways?
According to the central bank, $15.5 billion injected in one-year funds with its medium-term lending facility on Monday. Policymakers kept interest rates unchanged at 2.95%.
The cost of China’s ten-year bond was essentially flat. The seven-day repurchasing rate climbed 19 points to 2.19%, rising to the average level of the last year.
The move, which was widely anticipated by market analysts, signals that the injection will support the country’s stocks and bonds. Stocks are considered to be less liquid as of late, with investors relying on credit to invest in equities. As a result, industry observers believe that net insertions in the financial system will be the norm for the rest of the year.
“The PBOC will stay supportive of liquidity to ensure the supply of local government bonds can be readily absorbed, when inflation does not appear to be a major concern for the central bank,” said Frances Cheung, a rates strategist at Oversea-Chinese Banking Corp., in an interview with Bloomberg. “Beijing will step up injecting short-term cash soon, she added. “With the expected pick-up in issuance of bonds, chance is for some net injections as and when are needed.”
On Wednesday, the central bank will announce its loan prime rate (LPR) for May. Economists believe the benchmark will hold steady at 3.85% for the one-year LPR and 4.65% for the five-year LPR.
On the data front, retail sales increased 17.7% year-over-year in April, down from 34.2% in March. The market had penciled in a gain of 24.9%. The retail trade reported slowing growth in apparel, cosmetics, jewelry, telecommunications, furniture, and building materials.
Industrial production advanced at an annualized rate of 9.8%, matching market expectations. Housing prices rose 4.8% year-over-year in April. The unemployment rate fell to 5.1% last month. Fixed asset investment increased 19.9% year-to-date from the same time a year ago.
The USD/CNY currency pair rose 0.09% to 6.4432, from an opening of 6.4371, at 12:40 GMT on Monday. The EUR/CNY jumped 0.07% to 7.8243, from an opening of 7.8175.
– FX Daily Report