Offshore Yuan Hits Fresh 15-Month Peak

The offshore yuan weakened to around 6.78 per dollar on Monday, retreating from last week's gains as investors cautiously awaited key inflation data due later this week. Consumer inflation is expected to remain steady at 1.2%, while producer price inflation is forecast to accelerate slightly to 4.1% from 3.9%. A private survey recently showed the Services PMI eased to 54.1 in June from 54.4 in May but remained above expectations of 53. Official data showed the non-manufacturing PMI edged up to 50.2 from 50.1, defying forecasts for a slight contraction of 49.9. Meanwhile, the private Manufacturing PMI fell to 51.7 from 51.8, while the official gauge rose to 50.3 from 50.0, with both remaining in expansion territory. Overall, the data suggest China's economy ended the second quarter on a solid footing, supporting optimism as trade disruptions linked to the Iran conflict continue to ease.

The offshore yuan weakened to around 6.79 per dollar in June, reversing two consecutive months of gains as a stronger US dollar and a series of softer-than-expected daily fixings from the People's Bank of China weighed on the currency. The dollar strengthened as investors priced in higher-for-longer US interest rates, while ongoing uncertainty in the Middle East boosted demand for the currency's safe-haven appeal. Additional pressure came from the PBoC's persistent setting of weaker-than-anticipated reference rates, reinforcing expectations that authorities are comfortable with a gradual depreciation of the yuan. On the economic front, manufacturing PMI edged up to 50.3 from 50.0, exceeding market expectations of 50.1, supported by resilient demand for high-tech exports that helped offset trade disruptions linked to tensions in the Middle East. Meanwhile, the non-manufacturing PMI edged up to 50.2 from 50.1, beating forecasts of 49.9 and signaling continued stabilization in the sector.

The offshore yuan edged higher to around 6.79 per dollar on Monday, trimming losses from the previous week as the People's Bank of China unveiled a new policy initiative. The central bank introduced overnight reverse repo operations, injecting CNY 300 billion into the financial system to provide greater flexibility in short-term liquidity management and help smooth funding conditions in the interbank market. Separately, the PBoC injected an additional CNY 157.5 billion through seven-day reverse repos while leaving the borrowing cost unchanged at a record-low 1.4%, the benchmark rate that serves as China's main policy tool. However, the yuan's gains remained capped as the central bank continued to guide the currency lower through its daily fixing. The PBoC set the midpoint rate at 6.8175 per dollar, 134 pips weaker than the Reuters estimate. The focus now shifts to PMI data due later this week, which could provide fresh insight into the country's economic health.