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China’s yuan drops to weakest level in 14 years and is on track for its worst annual loss since 1994

Source : Markets Insider

China's yuan drops to weakest level in 14 years and is on track for its worst annual loss since 1994
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China’s yuan weakened to its lowest mark against the dollar since 2008, depreciating to about 7.2 per greenback Wednesday. 

The onshore unit dropped to a level not seen since February 2008, and has tumbled 12% versus the dollar so far in 2022, on pace for its worst annual loss since 1994. 

The offshore currency, similarly, dropped to a record low based on figures that date back to 2010, according to Bloomberg. 

The People’s Bank of China has this month consistently placed a strong bias to its currency reference rate, but Wednesday set it to its smallest margin β€” 444 pips stronger than the average Bloomberg survey estimate β€” since September 13, which signals policymakers may be easing support for the yuan. 

“The foreign exchange market is of great importance, and maintaining its stability is the top priority,” the bank said in a Wednesday statement, adding that traders shouldn’t be speculating against the yuan. “You will lose if you keep betting.”

Up until Wednesday, per Bloomberg, China’s central bank has set stronger-than-expected yuan fixings for nearly a month straight, the longest streak on record. 

Amid persistent COVID-19 policy complications and a property crisis, Beijing has attempted to maintain accommodative monetary policy as risks of deflation mount. A Bloomberg survey of economists forecasted that China’s gross domestic product will slow to 3.4% this year, which would mark the slowest rate in over 40 years, excluding 2020. 

Meanwhile, the Federal Reserve has maintained its hawkish rate-hiking path, which has bolstered the dollar to multi-decade highs.

The dollar’s rally has shown little sign of letting up, which has catalyzed a “reverse currency war.” Central banks around the world want to strengthen their currencies to ease the pressure of expensive imports and high inflation. 

However, these policy maneuvers heighten the risk of a global downturn, according to John Hopkins professor of economics, Franceso Bianchi. 

“I think that a [global] recession remains a real possibility, given that several central banks have moved in the direction of tightening monetary policy,” Bianchi told Insider on Tuesday. “Given that inflation does not seem to fade away, I do not expect monetary policy to change direction soon.”

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