Yuan bounces from 5-month low after PBOC pledges to keep market stable

SHANGHAI/SINGAPORE: China’s yuan clambered off a five-month low against the dollar in early trade on Monday, after the central bank pledged to do its utmost to prevent large fluctuations in the local unit.

Investors have refrained from aggressively testing new lows for the yuan after the central bank on Friday vowed to curb speculation and urged key participants to keep the market stable, traders said.

More action might be taken to prevent yuan depreciation following the verbal warnings, they added.

On Friday, major state-owned banks were seen swapping yuan for dollars in the onshore forwards market - a sign that authorities were trying to manage the rapid fall in the currency.

Prior to Monday’s opening, the People’s Bank of China (PBOC) set the midpoint rate at 7.0157 per dollar, 199 pips or 0.28% firmer than the previous fix of 7.0356.

That was 16 pips weaker than a Reuters estimate of 7.0141. In the spot market, the onshore yuan was changing hands at 7.0194 as of 0233 GMT, compared with 7.0615 - its lowest point in more than five months - hit on Friday.

Implied volatility, an options market gauge of future volatility, also stabilised in morning deals after sharp rises last week.

China’s yuan plumbs fresh Dec lows after weak PBOC fixing

Goldman Sachs analysts revised down their yuan forecasts, saying a lack of confidence in China’s economy was the biggest risk to the country’s recovery outlook for the second half.

“If confidence continues to erode and the negative feedback loop takes hold, a soft patch in Q2 could turn into disappointing growth in subsequent quarters,” they wrote in a note to clients.

They predict the yuan to trade at 7.1 per dollar in three months, 7.0 in six months, and 6.8 in 12 months, down from 6.8, 6.7, 6.5.

Yuan weakness and widening yield differentials with the United States have also limited the scope for substantial monetary easing, and China on Monday kept its benchmark lending rates unchanged for a ninth straight month.

As of 0233 GMT, the global dollar index was down at 103.033 compared with its previous close of 103.198, while the offshore yuan was trading at 7.0298 per dollar.