Yuan swings sharply higher on heavy dollar selling, PBOC remarks

SHANGHAI: China's yuan firmed on Tuesday in whipsaw trading that saw the currency guided to a near 2-1/2-month low against the dollar before rapidly recovering, supported by heavy dollar selling and central banker comments.

Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.5338 per dollar, 543 pips or 0.83% weaker than the previous fix of 6.4795, and the softest since Jan. 4.

The move in Tuesday's official guidance was the biggest one-day weakening in percentage terms since July 20, 2018.

Traders and analysts said the fixing came in line with forecasts, suggesting authorities were comfortable with some weakness in the Chinese currency at the moment.

The weaker midpoint fixing also dragged the spot market lower to 6.5445 at one point in morning trade, the softest level since Dec. 31, 2020.

But it recovered all the intraday losses and changed hands at 6.5225 by midday, 46 pips firmer than the previous late session close.

Currency traders said the V-shaped rebound was partially driven by heavier dollar selling from their corporate clients as some had been waiting for a better price to convert their dollar receipts.

"Large amounts of dollar selling emerged as the spot price approached 6.55 per dollar level," said a trader at a Chinese bank.

Several traders said they had not yet seen state banks stepping into the spot market to rein in the weakness in the yuan, which has happened in the past during bouts of yuan volatility.

A second trader said authorities were for now more willing to tolerate a slightly weaker currency than they were a strong yuan, which could hurt exporters.

Chen Yulu, deputy governor of the PBOC, told the state-backed Yicai published on Tuesday that the central bank would further improve rules and transparency of monetary policy operations to effectively manage and guide market expectations.

Some market participants described the senior central banker's remarks as part of an official attempt to prop up sentiment and said irrational and rapid moves were not ideal for authorities.

Wang Tao, chief China economist at UBS, still expects a broadly weaker dollar this year to benefit the yuan.

"In general, we believe the yuan will remains strong against the dollar this year, but the size of appreciation won't be as huge as last year," Wang said.

"While continuously attracting foreign investment into the Chinese market, the government is also gradually and steadily loosening some channels allowing domestic capital to invest overseas. Therefore, we expect the appreciation to be limited," she said, expecting the yuan to trade at 6.4 per dollar at year-end.

By midday, the offshore yuan was trading at 6.5344 per dollar after hitting a low of 6.5628, the weakest level since Dec. 1, 2020.