SHANGHAI/SINGAPORE: China’s yuan edged up against the dollar on Tuesday, as the central bank continued to lend support to prevent the yuan from weakening too fast and too far.
Similar to what was seen over the past week, the People’s Bank of China (PBOC) again set a stronger-than-expected official midpoint rate on Tuesday, a sign that market participants usually use to gauge official stance towards the foreign exchange market.
In addition, major state banks lowered their dollar deposit rates for the second time in a month, seven banking sources with direct knowledge of the matter said, as authorities stepped up efforts to arrest a slide in the yuan.
China’s yuan steadies from 8-month low after PBOC steps up support
The continued firmer-than-expected midpoint rates suggested that authorities have become increasingly uncomfortable with the rapid losses in the yuan, said a trader at a foreign bank.
The PBOC set the midpoint rate at a near two-week high of 7.2046 per dollar prior to market opening, 111 pips firmer than the previous fix of 7.2157.
Traders and analysts said the midpoint guidance was much stronger than their projections and it was 340 pips firmer than Reuters’ estimate of 7.2386.
“While it may take time to prepare the deployment of a massive stimulus package to mitigate under-delivery risk until the Politburo meeting at end-July, imposing a yuan fixing counter-cyclical factor to buy some time maybe a feasible policy option,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank, referring to the much strengthened guidance rate.
In the spot market, the onshore yuan opened at 7.2349 per dollar and was changing hands at 7.2329 at midday, 121 pips firmer than the previous late session close.
Widening yield differentials with other major economies, especially the United States, and a slowdown in China’s economy, drove the yuan down nearly 5% against the dollar so far this year - one of the worst performing Asian currencies.
Market participants have also been anxiously awaiting policy measures to prop up the economy, traders said.
“We still hold a glass half full view that a stimulus package could be unleashed after the Chinese leaders held multiple rounds of conversations with local and foreign business leaders and foreign counterparties,” Maybank analysts said in a note.
“We see these as a way to gather feedback and to come up with a more effective plan to support the economy.”
By midday, the global dollar index rose to 103.05 from the previous close of 102.988, while the offshore yuan was trading at 7.2428 per dollar.
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