China's yuan weakens, hurt by disappointing inflation data

China's yuan eased against the dollar on Monday, hurt by disappointing inflation data which reaffirmed market views of a slowing economy and fuelled investor concerns of deflation risks.

China's factory gate prices fell at the fastest pace in over seven-and-a-half years in June, missing expectations, while consumer prices were unchanged, as a faltering post-pandemic recovery weighed on demand.

The headline inflation data was soft and would not constrain the People's Bank of China's (PBOC) ability to loosen policy further, Capital Economics analysts said in a note.

"That said, with credit demand weak, and the currency under pressure, we think the bulk of support will come through fiscal policy," the analysts said, adding they expected only another 10 basis points of policy rate cuts this year.

Prior to the market opening, the PBOC set the yuan's midpoint rate USDCNY at a near three-week high of 7.1926 per dollar, 128 pips or 0.18% firmer than the previous fix of 7.2054.

And similar to the past two weeks, the official guidance rate continued to come in much stronger than market projections, traders and analysts said, a sign that markets interpreted as authorities having grown increasingly uncomfortable with recent yuan weakness.

Monday's midpoint was 206 pips firmer than Reuters' estimate of 7.2132.

In the spot market, the onshore yuan USDCNY opened at 7.2256 per dollar and was changing hands at 7.2339 at midday, 89 pips weaker than the previous late session close.

"The most important thing now to monitor is whether there will be non-monetary stimulus, how quickly it is delivered, if it meets the market's expectations in terms of magnitude and breadth, and the expected impact on growth," HSBC analysts said in a note.

They added the PBOC lowered key policy rates last month, but "these monetary policy measures alone actually deepen the negative yield differential."

The yuan is one of the worst-performing Asian currencies this year, knocked nearly 5% lower against the dollar by a slowdown in China's economy and widening yield differentials with other major economies, particularly the United States.

By midday, the global dollar index DXY rose to 102.452 from the previous close of 102.272, while the offshore yuan USDCNH was trading at 7.2415 per dollar.

The yuan market at 0345 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 the 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.