MacroscopeCan renminbi bulls expect a reprieve any time soon?

Tighter US monetary policy is in the offing and should continue to provide general support for the dollar on foreign exchanges

China’s coronavirus-related lockdowns are a big headwind for the economy, justifying a weaker yuan from a currency market perspective

3-MIN READ3-MIN

A man carrying a bag of groceries walks past a mural depicting an iconic financial market bull statue, near the central business district in Beijing, on April 18. Photo: AP

Published: 1:30am, 18 May 2022

The pace of yuan depreciation may have been rapid in recent months but that does not mean the slide is over. Spoiler alert: renminbi bulls of a nervous disposition might wish to look away now – there’s every possibility that the yuan will weaken further against the US dollar.

No one in Hong Kong needs reminding that the US dollar is strong. Under the linked exchange rate system, the Hong Kong Monetary Authority (HKMA) acts to ensure the US dollar/Hong Kong dollar exchange rate stays within a band of 7.75-7.85. With investors presently seeking higher yields in the United States, the US/Hong Kong dollar exchange rate has tested the upper end of the permitted band.

Consequently, last week, for the first time in 18 months, the HKMA responded to Hong Kong dollar weakness and sold US dollars, in line with its linked exchange rate system obligations. The HKMA may find it has more to do.

While headline US consumer price inflation (CPI) may have eased to 8.3 per cent year on year in April, down from March’s 8.5 per cent and a first decline in the annualised data since August, the Federal Reserve will not be popping the champagne corks just yet.

In fact, the Fed would do well to keep the champagne firmly on ice. The US central bank still has plenty to do, as it attempts to curb rising inflation which it had for so long categorised as “transitory”.

That misstep has not bolstered the Fed’s reputation in the eyes of the markets, and credibility is everything for any central bank or monetary authority. With Fed chief Jerome Powell now having secured cross-party congressional approval for a second four-year term, the US central bank may take off the monetary kid gloves.