(Bloomberg) -- Interest-rate differentials are turning against the yuan again and that’s likely to put short-term pressure on the currency, according to strategists.

The spread between three-month yuan Shibor, an indicator of Chinese bank wholesale borrowing costs, and the dollar Libor equivalent has expanded to the widest since November after shrinking late last year. China’s market is awash with liquidity from a central bank in easing mode, while the US is dealing with a hawkish Federal Reserve and uncertainties over a banking crisis. 

The People’s Bank of China injected a net 811 billion yuan ($118 billion) of short-term cash into the banking system this week, the most since January, despite signs the economy is recovery. That’s in addition to this month’s reserve-ratio cut that was expected to unleash about 500 billion yuan of long-term liquidity.

The slew of cash shows the PBOC is willing to provide extra liquidity to meet quarter-end demand and support the credit expansion, and it could also be a precaution against potential volatility in global financial markets, said Iris Pang, chief economist for greater China at ING Bank NV in Hong Kong.

Meanwhile, optimism over a dovish pivot from the Fed due to the recent US banking turmoil has faded as rescue measures tempered the market’s concerns, and traders boosted bets to further rate hikes.

Widening Gap

The rate on three-month yuan Shibor is currently 272 basis points below that on similar-maturity US Libor after the difference narrowed to 231 basis points in late December. 

The spread may only start narrowing again in the third quarter, assuming the Fed will be considering cutting rates in the final three months of the year, ING Bank’s Pang said.

For JPMorgan Chase & Co., the US-China interest-rate differential may weigh on the yuan’s resilience against a strengthening dollar. China’s currency has fallen about 2.6% from its high for the year set in January to close Thursday at 6.871 per dollar.

“The still negative yield differential means that USD/CNY could be less shielded from trend dollar strength this time,” JPMorgan strategists including Anezka Christovova in London wrote in a recent note. “We consider dips to sub-6.80 levels a potential entry point to re-engage with short yuan exposure.”

(Updates to add Friday’s cash injection in third paragraph.)

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