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Yuan Depreciation: Markets Anticipate Further Slide Amid Monetary Policy Adjustments

Posted on March 29, 2024
Writer: James Miller

As China’s yuan continues its decline, market insiders and analysts observe what appears to be a deliberate but moderate depreciation strategy by Chinese authorities. This approach aims to support the nation’s exports and align with its easy monetary policy stance. 

With a near 2% drop against the dollar this year, the yuan’s competitive edge is under scrutiny, especially as currencies from neighboring countries experience sharper declines. The People’s Bank of China (PBOC) has seemingly relaxed its defense of the yuan, allowing it to cross previously defended levels. 

This shift became evident last Friday when the absence of state banks’ intervention led to the yuan’s most significant daily decrease in almost three months. Analysts link this policy adjustment to the Bank of Japan’s recent abandonment of its negative rates, highlighting the global interplay affecting currency valuations.

Despite a resilient trade-weighted index for the yuan, which indicates a relative increase in value compared to China’s trading partners’ currencies, there’s growing concern over the potential erosion of export competitiveness. This situation is exacerbated by an uneven economic recovery, emphasizing the need for a strategically weaker yuan to boost export earnings. 

The global economic landscape, characterized by divergent monetary policies and fluctuating currency strengths, plays a significant role in the yuan’s future trajectory. While a more volatile yen presents opportunities for carry trades, its steadiness remains a focal point for investors and policymakers alike.

For more in-depth analysis and future projections on the yuan’s movement, read the full article on Reuters.

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