Forex Comment Mar 19

Yuan waiting on Fed, Japanese yen tightening

Chinese currency inching down towards 6.5200 could be stopped if Fed seeks to control soaring Treasury yields or if BOJ tightens policy  

Yuan waiting on Fed, Japanese yen tightening
All eyes are on the Bank of Japan.

(ATF) China’s yuan weakened Friday as the dollar climbed on rising Treasury yields following the Fed’s pledge to keep interest rates low.

The offshore yuan was set by the People’s Bank of China lower than Thursday at 6.5098 and it depreciated to 6.5181.

The Chinese currency has been weakening towards 6.5200 as the dollar has appreciated and Sino-US tensions have intensified.

Also on ATF

The Fed earlier this week said it will maintain its bond purchase stimulus programme and hold benchmark interest rates at 0-0.25%. 

That would ordinarily have sent the dollar down, but Treasury yields sent soaring on concern that stimulus will send inflation higher has pushed down stocks and sent investors scurrying for the safety of the dollar.  

If Treasury yields continue to rise, will the yuan continue to depreciate? 

No. The Fed is likely to purchase US long-term Treasury bonds in large quantities to control real interest rates, which would likely ease devaluation pressure on the yuan.

In addition, according to Nikkei, the Bank of Japan is expected to expand the floating range around its long-term interest rate target, which means that the Bank of Japan will take a step towards tightening policy.

If that happens, the yen is likely to appreciate and add downward pressure on the dollar.