The yuan extended declines after breaching the 7 per US dollar level as concerns that the US Federal Reserve might deliver an outsized rate hike next week eclipsed a string of attempts from the People’s Bank of China (PBOC) to support the currency.
The onshore and offshore yuan fell to the lowest since July 2020, even as China’s central bank yesterday set the currency fixing at 456 pips stronger than the estimates in a Bloomberg survey, on concern that Fed rate hikes would exacerbate China’s yield gap with the US and drive outflows.
The fixing pushback also fell short of the record 598 pips on Wednesday.
Photo: Reuters
While warning investors not to bet on any particular level, the 17 straight days of stronger-than-expected fixings have been the most visible signal from Beijing yet that it is seeking to stabilize the currency ahead of the Chinese Communist Party Congress next month, when Chinese President Xi Jinping (習近平) is expected to secure an unprecedented third term.
“It’s not a house-on-fire move,” said Brad Bechtel, global head of foreign exchange at Jefferies LLC, referring to the Chinese central bank reference rates. “The PBOC is quietly pushing back through the daily fixing, but they are not really doing anything else. Central banks have realized that it’s a dollar trade. They could fight it, but there’s not much they can do about it.”
Traders responded to the move by the People’s Bank of China by pushing the onshore yuan to as low as 7.0195 per US dollar, about 0.7 percent shy from the weak end of the 2 percent trading band around the fixing.
The gap between onshore yuan and the fixing stayed near 800 pips, which was the most since 2020.
Both of these indicate deepening bearish sentiment on the yuan.
The currency’s slide gathered pace on Thursday amid geopolitical concerns surrounding a meeting between Russian President Vladimir Putin and Xi, and the approval of the Taiwan Policy Act in the US, Morgan Stanley said in a note.
The stronger fixing is “unlikely to defend the psychological 7 level, but delay and smooth out the yuan depreciation pace, unless the PBOC takes other measures to support the yuan,” said Ken Cheung (張建泰), chief Asian foreign exchange strategist at Mizuho Bank.
A Shanghai Securities News report downplayed yuan’s losses and cited unnamed experts, saying wider swings in the exchange rate have become normal in recent years amid increased uncertainties in the global economy.
Still, policymakers have plenty in their toolbox to manage the currency, including by raising costs for investors to bet against the yuan by using forwards contracts, reducing the amount of dollar deposits banks need to set aside as reserves again as it did earlier this month, or in the worst case, resolve to direct intervention by selling the dollar.
However, the yuan’s relative strength versus other regional currencies might act as a deterrent. The yuan is at a 13-year high versus the South Korean won and 29-year high versus the Japanese yen.
Moreover, the trade-weighted yuan has remained little changed since last month, a Bloomberg tracker of the CFETS Index showed.
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