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Yuan Weakness to spill over into Asian Currencies

• The Indian rupee is expected to open lower following the weak Chinese yuan and risk-off sentiments. The dollar index strengthened along with the US treasury after hawkish commentsfromFederal officials.

• The forward markets indicate USDINR could open 30 to 32 paise higher near 81.90 odd levels, which will be the new record high.

• On Tuesday, spot USDINR oscillated in the narrow range before closing at 81.58. The delay in Indian bond inclusion in the JP Morgan bond index pushed the pair and bond yield higher in the second half of the trading session. Technically, the pair is still bullish and one can expect 82 and 82.90 if the dollar index continues to bid well while on the downside it hassupport at 81.

• The onshore yuan fell to the weakest level against the dollar since the global financial crisis in 2008, amid an incessant advance in the greenback and speculation China is toning down its support for the local currency. The onshore yuan weakened 0.7% to 7.2267 per dollar, a level unseen in 14 years, while the offshore unit slid to the lowest level in data going back to 2010. The currency is under pressure as the nation’s monetary policy with the US diverges further as the Federal Reserve hikes rates.

• As the dollar’s rally shows few signs of easing, Asian central banks may activate the ‘second line of defense’ such as macro-prudential and capital accounts tools for controlling unwarranted fluctuation in currency.

• Asian equities followed US shares lower after hawkish comments from Federal Reserve officials, while the dollar touched a fresh high after a White House official ruled out a currency agreement to weaken the greenback. US futures dropped after the S&P 500 capped its worstrun since early 2020.

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