SHANGHAI: China’s yuan slipped against a strengthening dollar on Thursday, but it drew support from persistently firmer-than-expected official midpoint fixings and a pause in the central bank’s monetary easing efforts.
The People’s Bank of China (PBOC) partially rolled over maturing medium-term policy loans while maintaining the interest rate as expected, with hawkish US Federal Reserve tightening leaving it limited room to manoeuvre on monetary policy.
“The PBOC has demonstrated its stance to defend the RMB exchange rate from breaking above 7 handle shortly and a rate cut will contradict such objective,” Ken Cheung, chief Asian FX strategist at Mizuho Bank, said in a note.
The Chinese central bank’s surprise cuts to key interest rates in August accelerated the yuan’s declines, taking it to two-year lows with a loss of more than 3% in a month.
Prior to the market opening, the PBOC continued to set the midpoint rate above market projections, traders said, in an attempt to curb rapid yuan depreciation during the recent dollar rally.
It fixed the guidance on Thursday at 6.9101 per dollar, 15 pips firmer than the previous fix of 6.9116 and 52 pips stronger than the Reuters estimate of 6.9153.
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“The PBOC continued to rely on daily fix to manage and guide RMB moves,” analysts at OCBC Bank said in a note.
“Stronger fix could continue to be featured but could only serve as an attempt to slow the pace of RMB depreciation.”
In the spot market, the onshore yuan opened at 6.9680 per dollar and was changing hands at 6.9666 at midday, 36 pips weaker than the previous late session close.
Several currency traders said they have recently adopted a rangebound, “buy low, sell high” trading strategy to liquidate long dollar positions around 6.97 per dollar.
“The strong dollar capped the upside room for the yuan, while too much weakness (in the Chinese currency) could trigger state bank actions,” said a trader at a foreign bank.
Investors will shift their attention to August activity indicators due on Friday to gauge the health of the world’s second-largest economy.
In global markets, the dollar stood near recent peaks as markets increased bets that the Federal Reserve has more work to do in its aggressive tightening streak to curb inflation.
By midday, the global dollar index rose to 109.714 from the previous close of 109.658, while the offshore yuan was trading at 6.9743 per dollar.
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