Chinese Yuan Gains: Analysts Predict Future Performance Amid Fed Rate Cuts

Potential Yuan Appreciation Linked to Federal Reserve Actions

Chinese yuan is likely to continue to gain against the US dollar, although further sustained appreciation would largely depend on the scale of the interest rate cuts by the US Federal Reserve, as well as the recovery in the world’s second-largest economy, analysts noted. The key driver for the yuan, along with other Asian currencies, will be the extent of the Fed rate cutting cycle.

Experts suggest that the People’s Bank of China (PBOC) may initiate gradual monetary policy easing, yet the primary influence remains on the Federal Reserve rate cuts influencing Asian currencies recovery against a weaker US dollar backdrop.

PBOC's Strategy and Economic Signals

On Monday, the PBOC set the midpoint rate - around which the yuan is allowed to trade in a 2 percent band - at 7.1027 per dollar, marking its strongest level since May. The yuan appreciated by 1.9 percent against the US dollar in August, contributing to the largest monthly change witnessed since November.

As US inflation continues to ease, it potentially paves the way for the first interest rate reduction by the US Federal Reserve since March 2022, creating a challenging outlook for the US dollar.

Market Dynamics and Future Implications

Federal Reserve Chair Jerome Powell indicated that the time has come for policy adjustments, highlighting a notable shift after 11 interest rate hikes from March 2022 to July last year. Analysts assert that there’s further room for the PBOC to relax policies to support economic growth in light of weak manufacturing data.

• China’s manufacturing purchasing managers index (PMI) recorded a contraction at 49.1 in August.
• Market trends suggest the spread between the US dollar and the Chinese yuan should remain narrow moving forward.

Analysts remain cautious, noting that pressure on the yuan persists while growth remains tepid.