China's yuan weakens as lending rate cut by less than expected, more stimulus awaited

The yuan weakened against the dollar after China cut a key lending benchmark rate on Tuesday, though rates were not reduced by as much as expected and the market was still awaiting more details on plans to stimulate a stuttering economic recovery.

China cut its lending benchmarks for the first time in 10 months, lowering the mortgage-linked 5-year rate by 10 basis points, though most market participants had expected a reduction of 15 bps, said Citi analysts.

The Citi analysts also noted that the lack of policy action to stabilize growth kept the offshore yuan weak despite “all the chatter in domestic media and from officials”.

Maybank analysts struck a similar note, saying the “yuan is weakened as a result of a lack of follow through in economic supports as promised by the government and rate cuts puts the yuan with more negative carry against the dollar”.

Prior to market's opening, the People's Bank of China set the midpoint rate CNY=PBOC at 7.1596 per U.S. dollar, 395 pips weaker than the previous fix 7.1201 and the weakest level in six months.

The spot yuan CNY=CFXS opened at 7.1680 per dollar and was changing hands at 7.1754 at midday, 134 pips weaker than the previous late session close.

The offshore yuan CNH=D3 was trading 49 pips weaker than the onshore spot at 7.1803 per dollar.

The one-year forward value for the offshore yuan CNH1YOR= traded at 6.9702 per dollar, indicating a roughly 3.01% appreciation within 12 months.

By midday, the global dollar index .DXY fell to 102.503 from the previous close of 102.522.