The yuan yesterday rose to a four-week high against the US dollar after China’s central bank revived a “counter-cyclical factor” in its daily fixing to support the currency, arresting a record 10-week slide that has rattled global markets.
The People’s Bank of China (PBOC) on Friday said it was adjusting the way it calculates the yuan’s official midpoint to keep it more stable amid US dollar strength and trade tensions between Washington and Beijing.
The move to stabilize the yuan came a day after the latest US-China talks aimed at resolving the trade war ended with little progress, with tougher US measures expected to begin next month that could add more pressure on the Chinese currency.
US President Donald Trump has accused China of manipulating its currency to help cushion the blow from US tariffs on Chinese imports.
“The PBOC move validates our views that yuan devaluation is not a weapon of the trade war,” Mizuho Bank analysts said in a note.
“It also resonates with our ‘7-3’ stability threshold hypothesis, which refers to not breaching 7 for dollar-yuan and FX reserves not falling below US$3 trillion,” they wrote.
Prior to the market opening yesterday, the PBOC lifted its official yuan midpoint more than expected to 6.8508 per US dollar, 202 pips, or 0.3 percent, firmer than the previous fix of 6.8710 on Friday.
The PBOC is not believed to have used the mysterious adjustment factor since January, when the yuan was on a firming trend, though traders suspect the bank might have been testing the waters in recent sessions as the US dollar continued to climb.
The PBOC’s confirmation of the move was seen as a signal that it is not comfortable with further losses, which could fuel capital outflows, especially as the yuan flirts with the psychological support level of 7 yuan to the US dollar.
“How the factor works per se is much less important than the clear signal sent by the PBOC that it would defend 7.0 at least in the next couple of months,” said Larry Hu (胡偉俊), head of greater China economics at Macquarie in Hong Kong.
The yuan had a rapid appreciation in six months after the factor was first introduced in May last year, Hu said.
Late gains in offshore markets after the announcement on Friday spared the currency from an 11th consecutive weekly loss.
However, it had already posted the longest weekly losing streak since the exchange rate was unified in 1994.
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