SHANGHAI: China’s yuan weakened further on Tuesday, despite new central bank steps to defend the currency, as fresh hawkish remarks from US Federal Reserve officials pointed to further dollar strength.
The yuan’s midpoint hit a fresh 27-month low, even after the People’s Bank of China (PBOC) on Monday announced the reintroduction of a 20% forex forward risk premium to discourage dollar purchases.
Analysts expect more intervention measures if the yuan falls too fast.
The spot market opened at 7.1601 per dollar and was changing hands at 7.1623 at midday, 0.38% weaker than the previous late session close.
The People’s Bank of China set the midpoint rate at 7.0722 per dollar prior to market open, which again was higher than markets’ expectations, maintaining a pattern of a stronger bias recently to support the yuan.
“With the dynamic CNY fixing guidance, the PBoC aims at keeping the RMB depreciation at an orderly pace, but refrains from drawing a line in the sand to defend a particular level,” wrote Ken Cheung, chief FX strategist for Asia at Mizuho Bank.
China’s yuan hits 28-month low despite fresh policy step, nears daily down-limit
Fuelling expectations of further dollar strength, US Fed officials on Monday sloughed off rising volatility in global markets, saying their priority remained controlling domestic inflation.
Traders said the PBOC appears to be seeking to prevent the yuan from hitting the lower end of its daily trading limit. Currently, the spot rate is allowed to trade with a range of 2 percent above or below the official fixing on any given day. The yuan almost hit the lower limit on Monday.
“If the yuan slumps to the daily trading limit, that could have a big psychological impact on the market,” said a trader at a foreign bank in China.
The PBOC has more tools available to stem losses, including guiding state banks to sell dollars, or limiting the supply of offshore yuan, and analysts said they could resort to those measures if necessary. Analysts also said sound economic fundamentals are key to supporting the yuan.
“If Chinese leaders could manage to roll out proactive measures to counter downside risks after the 20th Party Congress, we reckon that the CNY could weather the storm of USD strength and find its support in the medium term,” Cheung added, referring to the Communist Party Congress to be held from Oct 16.
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