China's yuan hits 6-mth low, investors on guard against widening yield gap

China's yuan weakened to a fresh six-month low against the dollar on Monday, with investors anxiously awaiting a slew of central bank policy decisions in China and abroad this week.

Policy meetings of the Federal Reserve, the European Central Bank (ECB) and the Bank of Japan (BOJ) will likely offer clues on the future path of interest rates, while the People's Bank of China (PBOC) is due to roll over maturing policy loans.

A batch of 200 billion yuan ($28.00 billion) worth of medium-term policy loans are due to mature on Thursday, and focus is on the rate at which they are rolled over.

A cut, which is possible given China's post-pandemic recovery has begun to sputter, would increase the gap between U.S. and Chinese rates and could weigh on the yuan.

Recent disappointing domestic data has raised expectations for more monetary easing by the PBOC.

"As a result, China has been experiencing portfolio outflows while exporters have been holding back on converting their foreign currency receipts, reducing onshore yuan demand," said Khoon Goh, head of Asia research at ANZ.

In the spot market, the onshore yuan USDCNY opened at 7.1300 per dollar and eased as far as 7.1479, the weakest level since Nov. 30, 2022. By midday, it was changing hands at 7.1428, 143 pips softer than the previous late session close.

Its offshore counterpart USDCNH also touched a more than six-month low of 7.1583 before trading at 7.1525 around midday.

Prior to market opening, the PBOC set the midpoint rate USDCNY at 7.1212 per dollar, 97 pips weaker than the previous fix of 7.1115.

Expectations of further widening in yield gap between the world's two largest economies pressured the forwards market. The benchmark one-year dollar/yuan swaps traded offshore (CNH1Y=) fell to a record low of -2,137 points.

If the PBOC holds rates steady this week, "the window for rolling out a large stimulus could be delayed until the Chinese Politburo meeting, which is usually held at end-July, when the Q2 data will be available to assess China's growth outlook," said Ken Cheung, chief Asian FX strategist at Mizuho Bank.

Investors are also awaiting China's May credit lending data due this week to gauge the health of the economy.

The yuan market at 0337 GMT:

ONSHORE SPOT:

Key indexes:

*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.

OFFSHORE CNH MARKET

*Premium for offshore spot over onshore USDCNY

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