Yuan slightly weaker, though rate rise eases downward pressure

Chinese yuan traded slightly weaker on Friday morning, though the central bank’s decision to raise borrowing costs will have alleviated some of the pressure on the currency.

Offshore yuan in Hong Kong was 0.11 per cent, or 77 points, weaker at 6.8773 as of 10.55 am, and onshore yuan in Shanghai traded 0.1 per cent, or 67 points, stronger at 6.9017.

The People’s Bank of China guided the midpoint rate down by 11 basis points, or 0.02 per cent, to 6.8873. Traders in the mainland are allowed to trade the currency within a 2 per cent range of the guided price.

The central bank raised monetary rates for the second time this year on Thursday after the US announced it was increasing its benchmark rate. The PBOC raised the reverse repo rate by 10 basis points and injected 303 billion yuan into the banking system via the medium-term lending facility(MLF).

“The tightening policy helps to ease the pressure on the Chinese yuan,” said Chen Yong, an analyst at Lian Xun Securities.

The fact the Chinese central bank raised its borrowing rates the same day as the US rate rise shows it intends to stabilise the yuan by narrowing the difference in rates, Chen added.

The US Federal Reserve early on Thursday raised the target overnight interest rate by 25 basis points to a range of 0.75 per cent to 1.0 per cent. It was the second increase in three months.

The Fed signalled there would be two further increases this year. However, Fed Chair Janet Yellen hinted that the pace of rate increases may be more gradual than the market has been expecting.

On Thursday, the Bank of England voted to keep interest rates unchanged at 0.25 per cent. The British pound traded 0.06 per cent weaker at 1.2350 against the dollar, while the euro strengthened for a third day, up 0.09 per cent stronger at 1.0774.

The yen was 0.13 per cent weaker at 113.46.