Macroscope | How China’s neutrality on Ukraine war fuels the narrative of a weakening yuan
- Rising US Treasury yields and the ripple effects of China’s ‘zero-Covid’ policy are adding to the allure of the US dollar for investors
- Negative reactions to China’s stance on Russia’s invasion raises the chances of Western investors pulling out of Chinese assets and the yuan
British poet T.S. Eliot once wrote that “April is the cruellest month”. This April has certainly been cruel to those currency traders who were positioned for a further strengthening of the yuan against the US dollar. And May might not prove to be any better.
Foreign exchanges seem to have concluded that there are not only good reasons to buy the US dollar but also specific reasons to sell the renminbi. The attractiveness of rising US Treasury yields accounts for much of the current allure of the US currency to investors.
The market’s expectations of larger, faster US rate increases could begin to be realised at the central bank’s next rate-setting meeting on May 3 and 4. Fed chief Jerome Powell acknowledged last week both that a possible increase of 0.5 per cent “will be on the table for the May meeting” and that there was some merit in the idea of “front-loading” any increases the Fed feels are needed.