The People’s Bank of China (PBOC) is taking steps to restrain the yuan’s rally while stopping short of encouraging declines, a sign that officials are willing to tolerate some currency strength.
After scrapping a two-year rule on Saturday that made it expensive to bet against the yuan, the PBOC yesterday set its daily reference rate only slightly weaker than analysts expected.
While the moves triggered a 0.6 percent slide in the yuan in early trading, the currency pared the decline in afternoon trade. The yuan is still up 4.3 percent in the past three months.
Photo: AP
Analysts said the moves would reduce one-way bets on the yuan, slowing a rapid ascent that had pushed it to its strongest since April last year versus the US dollar.
The yuan surged about 1.6 percent on Friday when the currency traded for the first time this month following China’s National Day holidays, extending its best quarterly advance in 12 years.
It was trading 0.3 percent weaker at 6.7154 per US dollar as of 2:19pm in Shanghai yesterday.
“Authorities don’t want the yuan appreciating too quickly,” said Xing Zhaopeng (刑兆鵬), an economist at Australia and New Zealand Banking Group Ltd in Shanghai. “But the PBOC also doesn’t want the yuan to depreciate too much. This is a cautious move and will not reverse the trend.”
A recovering economy, a hefty yield premium in sovereign debt over US Treasuries and the prospect of a US victory by former US vice president Joe Biden, the Democratic Party’s presidential candidate, are all providing tailwinds for a currency that earlier this year was near its lowest level since 2008.
The PBOC’s reference rate was fixed yesterday at 6.7126 per US dollar, compared with the average estimate of 6.7073 in a Bloomberg survey.
The reference rate is decided based on a formula that takes into consideration the onshore yuan’s official close at 4:30pm on the previous trading day and major currencies’ moves overnight.
As of yesterday, financial institutions no longer need to set aside cash when buying foreign exchange for clients through currency forwards, according to a statement from the PBOC on Saturday.
When the PBOC in September 2017 similarly cut the cost to zero following sharp gains, the yuan slumped about 2.5 percent in the next three weeks.
Banks previously had to hold on to 20 percent of sales on some foreign-exchange forward contracts, a move imposed two years ago when the currency slumped toward 7 per US dollar.
Separately, the US dollar might tumble to its lows of 2018 on the rising likelihood of Biden winning the US election and progress on a COVID-19 vaccine, Goldman Sachs Group Inc said.
Goldman joins the likes of UBS Asset Management and Invesco Ltd in predicting a weaker US dollar as Biden extends his lead over US President Donald Trump with less than three weeks to the US elections.
It recommends investors short the US dollar against a volatility-weighted basket consisting of the Mexican peso, South African rand and Indian rupee.
Goldman strategists also suggest buying the euro, and Canadian and Australian dollars against the greenback.
The firm is keeping open long recommendations for the yuan through unhedged Chinese government bonds.
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