China's yuan hovered near a 13-month low against the U.S. dollar on Tuesday, pressured by bond yields near record-lows amid a slow economic recovery at home and higher-for-longer U.S. rates dominating investors' minds.
The yield gap between 10-year Chinese and U.S. bonds widened to the largest since November 2000, prompting investors to plow money into dollar-denominated assets for higher returns.
Yields on China's long-dated government bonds, including 10-year and 30-year, hovered near record lows at 1.7% and 1.98%, respectively, as investors head for 2025 betting there will be no sharp recovery in the economy.
"What is clear is the upcoming aggressive monetary easing, which implies a medium-term downward trend for government bond yields, as well as depreciation pressure on the currency," Barclays analysts said in a note, referring to Beijing's pledge to deliver more policy support to shore up the economy.
"We expect stimulus to be slow and the CNH softness and structural weakness in China, along with the trade conflict with the U.S., to leave EM currencies that are closely linked to China still vulnerable," they said.
Reuters reported on Tuesday that China plans to issue 3 trillion yuan worth of special treasury bonds next year. Government bond yields were up after the news, while the yuan was largely unchanged.
Additionally, China's finance ministry said that it will ramp up fiscal support for consumption next year by raising pensions and medical insurance subsidies for residents as well as expanding consumer goods trade-ins.
The spot yuan opened at 7.2950 per dollar and was last trading 15 pips lower than the previous late session close at 7.2985 as of 0619 GMT, close to levels last seen in November, 2023. The onshore yuan has been trading just below the key 7.3 level in recent sessions.
Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1876 per dollar, 1,155 pips firmer than a Reuters' estimate.
"The central bank doesn't want the yields to decline too fast as that could pressure the exchange rate, but they also don't want the yields to go up rapidly as that will hinder economic recovery and demand growth," said analysts at Bank of Ningbo in a webinar.
The analysts expect the 10-year treasury yield to track between 1.6%-1.9% in 2025.
The yuan has also been undermined by a dollar being driven up by the prospect of higher-for-longer U.S. interest rates.
The dollar's six-currency index was 0.065% higher at 108.16. The offshore yuan traded at 7.3042 yuan per dollar, up about 0.04% in Asian trade. - Reuters
