China's yuan weakens on growth concerns, widening interest rate differential

The yuan weakened on Wednesday (10 May) as April trade data heightened concerns about the outlook for China's economic growth, and a widening yield differential between US and Chinese bonds also deterred investors.

While China reported a higher-than-expected $90 billion April trade surplus, investors were disappointed by a sharp contraction in imports and slower export growth.

"Investors are taking a conservative stance on the yuan as they want to see broader evidence that China's recovery is also fueled by external demand, not just domestic consumption," said Kiyong Seong, macro strategist at Societe Generale in Hong Kong.

And while Chinese government bond yields have trended lower, US treasuries' yields have trended higher this week, dampening demand for the yuan.

China's benchmark 10-year government bonds <CN10YT=RR> slipped to 2.73% last week, the lowest since November, before rebounding to 2.745% on Wednesday. Ten-year US treasury <US10YT=RR> yields were at 3.51%.

Spot yuan <CNY=CFXS> opened at 6.9240 per dollar and traded at 6.9272 at midday, 72 pips weaker than the previous late session close and 0.04% stronger than the midpoint.

People's Bank of China set the midpoint rate <CNY=PBOC> at 6.9299 per US dollar prior to market open, weaker than the previous fix 6.9255. The spot rate is currently allowed to trade with a range 2% above or below the official fixing on any given day.

"While China's high trade surplus at $90 billion is supportive of the yuan, equity flows may soften as investors parse a highly uneven demand recovery story post-reopening," said DBS in a research published on Wednesday.

It said that the yuan will likely hover around 6.9 level "until a broader upturn is seen."

The global dollar index <.DXY> fell to 101.541 from the previous close of 101.605.

The market is closely watching US inflation data due out later on Wednesday, after stronger-than-expected jobs data last week had raised expectations that the Federal Reserve could keep interest rates higher for longer.

The offshore yuan <CNH=D3> was trading 0.06% weaker than the onshore spot at 6.9313 per dollar.

The one-year forward value for offshore yuan <CNH1YOR=> traded at 6.7588 per dollar, indicating a roughly 2.55% appreciation within 12 months.