Can China’s pummelled yuan find strength with US Fed pausing interest hikes?

The US Federal Reserve's recent decision to halt its interest-rate hikes has provided China with a temporary respite. However, analysts argue that this 'breathing room' does not alleviate the urgency for Chinese regulators to mitigate cross-market contagions and stabilize the yuan exchange rate. The Federal Reserve announced on Wednesday that interest rates would remain unchanged, ranging from 5. 25 to 5. 5 per cent. The last hike occurred in July, marking the 11th increase since early 2022 and reaching a 22-year high.

These rate increases have exerted additional pressure on the yuan, which has recently hit a 16-year low against the US dollar. China is also grappling with a multitude of financial challenges, including foreign investors withdrawing capital from China's onshore stock exchanges amid plummeting equity prices. Ming Ming, chief economist at Citic Securities, anticipates a slight decrease in pressure on the yuan for a short period following the Federal Reserve's decision. He characterized Federal Reserve Chairman Jerome Powell's speech as more 'neutral', despite Powell's assertion that they remain open to future rate increases after evaluating job and inflation data.

The US dollar index, which gauges the currency's performance against a basket of other major currencies, was able to retract from an 11-month high of 107, according to Ming. This index increases when the dollar gains 'strength' relative to other currencies. Beijing has prioritized the yuan's stability while managing financial risks, particularly in cross-market contagions. This stance remained unchanged at its five-yearly financial work conference that concluded on Tuesday. Both China's central bank and the forex regulator, the State Administration of Foreign Exchange (SAFE), pledged to prevent one-way bets on the yuan's exchange rate and its volatility, while promoting the market-oriented reform of an exchange-rate-formation mechanism.