Through its daily reference rate, China responded to a weaker yuan in the strongest way it has ever done in an effort to restore market confidence that had been shaken by disappointing data and elevated credit concerns. According to a Bloomberg survey of traders and economists, the People's Bank of China fixed its so-called fixing …
Through its daily reference rate, China responded to a weaker yuan in the strongest way it has ever done in an effort to restore market confidence that had been shaken by disappointing data and elevated credit concerns. According to a Bloomberg survey of traders and economists, the People’s Bank of China fixed its so-called fixing at 7.2006 per dollar, vs an average prediction of 7.3047. Since the poll’s start in 2018, that discrepancy was the biggest. After the fixing, which was also set at a better level than the previous day for the first time in six sessions, the offshore yuan increased gains to 0.2%. The PBOC “might want to put a stop to the trend” of a depreciating yuan at this point, according to Kiyong Seong, head of Societe Generale SA’s Asia macro strategy. It’s possible that the moves taken by policymakers will temporarily deter more pessimistic bets.
Over the past week, authorities have increased their support for the beleaguered yuan, only to watch it decline to multi-year lows in domestic and international markets. According to persons with knowledge of the situation, they instructed state-owned banks to increase their intervention, and the central bank declared that it will fiercely avoid excessive yuan adjustment. The people said that request came as the yuan dropped toward a level of 7.35 to the dollar, which top leadership has been closely monitoring. On Friday, the yuan fluctuated around the 7.29 mark offshore. According to Ken Cheung, chief Asian FX analyst at Mizuho Bank Ltd. in Hong Kong, “going forward, further measures such as potential cuts to the foreign-exchange reserve-requirement ratio following the PBOC’s pledge to prevent overshooting may prompt yuan bears to trim their short position.”
State Banks Were Ordered to Increase Yuan Intervention by China. The issue for China is that yuan bears mistook the fact that the fixing itself had become steadily weaker over the previous weeks, notwithstanding its gap to estimates, for a sign that the PBOC was okay with the currency’s steady depreciation. Sentiment is also being affected by dismal economic data related to retail sales and home prices, as well as a growing crisis in the real estate industry. Australia & New Zealand Banking Group strategists, including Mahjabeen Zaman, said in a note on Thursday that “the PBOC has persisted in setting the fixings much stronger than expected, with the largest counter-cyclical factor since late last year, but they have been allowing the yuan to adjust.” This demonstrates that the government is giving supporting growth a higher priority than maintaining the value of the currency. A lackluster economic recovery and widespread dollar strength have caused China’s yuan to depreciate nearly 5% against the dollar this year.
Rate reductions by the PBOC to spur development have only heightened awareness of the expanding US-China yield gap and increased pressure on the yuan. According to the PBOC’s monetary policy report, the foreign exchange market is now in line with fundamentals. According to Khoon Goh, head of Asia research at Australian & New Zealand Banking Group in Singapore, “the authorities are getting ready to draw a line in the sand and defend the currency from further weakness.” However, “we really need to see US 10-year bond yields come down from current high levels for a more sustained rebound in the yuan.”
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