SHANGHAI: China's yuan bounced from a 5-1/2-month low against the US dollar hit last week, helped by a firmer-than-expected midpoint and the central bank's pledge to keep the currency stable.
Prior to market opening on Monday, the People's Bank of China (PBOC) lowered its official midpoint for the eighth straight day to 6.8988 per dollar, 129 pips or 0.19 weaker than the previous fix of 6.8859. Monday's fixing was the softest since Dec. 24, 2018.
However, traders said recent official fixings have come in persistently higher than consensus. On Monday, the midpoint was 78 pips firmer than Reuters' estimate of 6.9066.
Some analysts attributed the firmer-than-expected midpoint fixing to PBOC's active use of "counter-cyclical factor", which was first introduced in May 2017 to the midpoint-setting formula in an attempt to reduce price swings and counteract depreciation expectations.
"We have seen the stabilising efforts from the PBOC through
the counter-cyclical factor, with the counter-cyclical factor being consistently on the strong side recently and notably," economists at Goldman Sachs said in a note.
In the spot market, onshore yuan opened at 6.8975 per dollar and was changing hands at 6.9078 at midday, 110 pips firmer than the previous late session close but 0.13 percent softer than the midpoint.
Traders also attributed the firmer spot yuan to the PBOC's pledge to keep the yuan stable, the first official comments on the exchange rate since the start of the currency's recent rapid depreciation.
The yuan has lost more than 2.5 percent to the dollar since US President Donald Trump said on May 5 he was going to raise tariffs on $200 billion of Chinese imports. The renminbi has lost all of its gains so far this year.
Pan Gongsheng, deputy governor of the People's Bank of China (PBOC), told the PBOC-run Financial News in an interview that the central bank was confident of its ability to maintain stable operations in China's foreign exchange market.
Pan also reiterated that the central bank will maintain basic stability of the yuan exchange rate within a reasonable and balanced range.
A trader at a foreign bank said Pan's remarks lifted market sentiment as it could suggest that the authorities would forcefully guard the yuan amid escalating trade tensions.
And the comment also effectively curbed some market speculation that China would allow the yuan to weaken past the psychologically key 7-per-dollar level to offset the negative impact of higher US tariffs, the trader added.
Sheng Songcheng, a former director of the Financial Survey and Statistics Department of the PBOC, was quoted as saying by state-run media Yicai on Monday that a breach of 7 yuan per dollar was not beneficial for China as that would be a shock for market confidence and lead to more pressure from capital outflows.
Policy sources also told Reuters last week the PBOC will use foreign exchange intervention and monetary policy tools to stop the yuan weakening past the key 7-per-dollar level in the near term.
As of midday, the offshore yuan was trading at 6.9345 per dollar.
The global dollar index rose to 98.024 at midday from the previous close of 97.995.
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