SHANGHAI: China’s yuan rebounded on Tuesday from a more than two-year low hit in the previous session, after the authorities rolled out fresh policy measures to stem its recent rapid fall.
The People’s Bank of China (PBOC) said it would cut the amount of foreign exchange reserves that financial institutions must hold, the latest measure seen as aimed at slowing the yuan’s fast depreciation. The central bank has set firmer-than-expected yuan midpoint guidance rates in recent sessions.
The onshore yuan lost over 2% against the dollar in August pressured by a buoyant dollar and a slowing domestic economy.
“The goal is clearly to stabilise the CNY against the backdrop of fast appreciating USD, as an extension of a clear strengthening bias in daily fixing,” said Becky Liu, head of China macro strategy at Standard Chartered.
But Liu added the move was “insufficient” to trigger a turnaround in the yuan and expected the unit to test the psychologically important 7 per dollar level in coming weeks.
A string of other major investment houses have also cut their yuan forecasts recently, with some expecting a breach of the key milestone before next month’s politically sensitive Party Congress, despite authorities’ efforts to slow the slide.
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Prior to market opening, the People’s Bank of China (PBOC) set the midpoint rate on the weaker side of the key 6.9 per dollar level for first time in two years at 6.9096, 98 pips or 0.14% weaker than the previous fix of 6.8998.
Still, the fixing was much stronger than market projections for the 10th consecutive trading day, and it was 208 pips firmer than Reuters’ estimate of 6.9304.
Traders and analysts interpreted the firmer-than-expected guidance as part of official efforts to rein in the yuan.
The yuan’s 6.9 per dollar level has long been seen as the last supportive level before breaching the critical 7 mark.
“The PBOC might have tolerance for further CNY depreciation against the USD, especially as the broad USD continues to strengthen, though they might want to avoid continued and too fast one-way depreciation if possible,” analysts at Goldman Sachs said in a note.
In the spot market, the onshore yuan rebounded from a more than two-year low of 6.9445 per dollar hit in the previous session to trade at 6.9355 as of 0248 GMT.
Its offshore counterpart followed the suit and traded at 6.8625 as of 0248 GMT.
The onshore yuan has lost 2.8% against the dollar since mid-August, but has eased only slightly over that same period on a trade-weighted basis.
The CFETS index, a gauge of the yuan’s strength against the currencies of its major trading partners, fell 0.08% over the past three weeks and last stood 101.96 on Tuesday.
Ting Lu, chief China economist at Nomura, said the PBOC’s recent policy actions showed that it cared specifically about the yuan-dollar exchange rate.
“In a year of the once-in-a-decade leadership reshuffle and with elevated U.S.-China tensions, Chinese leaders especially care about RMB’s bilateral exchange rate with USD because they believe RMB/USD somehow reflects relative economic and political strength,” Lu said.
The Japanese bank sees further downside in the yuan, and expects it to trade at 7.2 per dollar at the end of 2022.
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