HONG KONG: China’s yuan firmed against the dollar on Thursday after the central bank offered more reassurances to markets worried by the currency’s recent sharp falls.
“Even if the yuan exchange market has a panic unilateral trend, there are abundant tools to calm the ‘herd effect’ and ensure the smooth operation of the foreign exchange market,” the Financial News, a publication backed by the People’s Bank of China (PBOC), said on Wednesday.
That reassurance was immediately followed up by action on Thursday as the central bank set another stronger-than-expected midpoint fixing for the fourth-straight day this week, which traders believe is an attempt to prevent the yuan from weakening too fast and too far.
The PBOC set the midpoint rate at 7.2098 per US dollar prior to market open, weaker than the previous fix of 7.1968, but 400 pips firmer than Reuters’ estimates.
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It was the strongest deviation seen so far since the central bank started setting the midpoint fixing higher than estimates since the end of June.
“We expect broad yuan stability going forward, supported by a tightening on (various) policy measures,” said DBS analysts in a research note on Thursday, citing the use of the daily fixing as an example.
Spot yuan opened at 7.2507 per dollar and was changing hands at 7.2489 at midday, 31 pips stronger than the previous late session close and 0.54% weaker than the midpoint.
The spot rate is allowed to trade with a range 2% above or below the official fixing on any given day.
The Financial News commentary on Wednesday was one of the strongest verbal pledges to keep the yuan stable in the current sell-off since May.
That, coupled with the strong daily fixings this week, signals that the PBOC is keen to anchor the midpoint fixing at 7.19 to 7.2 per dollar “so that the spot yuan won’t weaken further to the 7.3 level,” said Ken Cheung, chief Asian FX strategist at Mizuho.
The closely watched 7.3 level was last reached in early November 2022, when China’s growth outlook was still undermined by its strict zero-COVID policy.
“But now China has reopened, and the US is nearing the end of its hiking cycle, further weakening of the yuan to the 7.3-level looks unjustified,” said Cheung.
Investors will also be looking for signals from Janet Yellen’s first trip to China as US Treasury Secretary starting later in the day. It will focus on recalibrating ties between the world’s two largest economies as military communications remain frozen and Beijing’s new restrictions on exports of some metals spark fresh tensions, weighing on Chinese markets.
The global dollar index fell to 103.35 from the previous close of 103.373.
The offshore yuan was trading 0.16% away from the onshore spot at 7.2603 per dollar.
The one-year forward value for the offshore yuan traded at 7.0461 per dollar, indicating a roughly 3.04% appreciation within 12 months.
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