China signals its discomfort over yuan rally with daily fixing
BEIJING (BLOOMBERG) – China’s central bank has signaled a limit to its tolerance for the yuan’s recent advance by setting its reference rate at a weaker-than-expected level.
The gap between the daily fixing set by the People’s Bank of China and the forecast in a Bloomberg survey of analysts and traders was the largest since mid-October. That was when yuan gains accelerated on strong trade data and hopes of easing tensions between China and the United States.
The PBOC on Thursday (Dec 9) set the fixing at 6.3498 per dollar, weaker than the average estimate of 6.3467. The fixing limits the yuan moves by 2 per cent on either side. The onshore yuan was little changed at 6.3448 as of 11.45am in Shanghai, while the offshore yuan gained 0.1 per cent to 6.3418.
Thursday’s move illustrates Beijing’s wariness of rapid gains in the exchange rate given traders can unwind their long positions just as quickly. It comes after the yuan advanced to its strongest level against the dollar since May 2018, with confidence boosted by official signals of more easing to support the economy.
“The weaker-than-expected fix is a reminder to markets that the currency is being watched and the central bank wants to prevent appreciation bets from snowballing,” said Fiona Lim, a senior foreign-exchange strategist at Malayan Banking.
This year, the yuan has been supported by strong inflows given China’s robust exports and foreign investment in onshore bonds. The currency was more recently aided by bets that Beijing’s monetary stimulus will sustain the nation’s growth and that the new Covid variant will have limited impact on the global recovery.
The PBOC this week announced a cut to the amount of cash lenders need to set aside as reserves, suggesting Beijing is prioritising growth over crackdowns on the property sector and technology industry. Looser monetary policy can act as a double-edged sword for the exchange rate in the medium term. While flush liquidity supply benefits the yuan by aiding growth, it could also hurt foreign demand for the currency as it reduces China’s rate premium over the rest of the world.
State-run media reiterated on Thursday that the currency will continue to fluctuate both ways. The yuan could keep gaining against the greenback in the near-term due to strong exports, fund inflows and a stable monetary policy, China Securities Journal said in a front-page report, citing analysts.
Defying virus concerns and bets on US rate hikes, the yuan has erased almost all losses against the dollar since China and the US started a prolonged trade war. It is hovering near a six-year high versus a basket of trading partners. Gains have started to look excessive, with a technical gauge suggesting the yuan is near overbought territory.
Policy makers had previously been more hands-off in their approach to the rally, using only slightly weaker fixings and issuing prompts to traders about not making one-way bets. Other tools Beijing can use to manage the yuan include tightening the liquidity of dollars onshore – which was deployed once in June – and encouraging lenders to submit weaker quotes for the reference rate.
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