China’s central bank yanks yuan off 16-year low with strongest fixing bias

SHANGHAI/SINGAPORE: China’s central bank yanked the yuan off a 16-year low against the dollar on Monday by setting a daily midpoint guidance rate with the strongest bias on record, signaling increasing discomfort with the currency’s recent weakness.

Prior to the market’s opening, the People’s Bank of China (PBOC) set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.2148 per dollar, 3 pips firmer than the previous fix of 7.2150.

That was 1,289 pips firmer than the Reuters’ estimate of 7.3437, and was the largest deviation from market projections on record.

For the past few months. The PBOC has set firmer-than-expected daily guidance rates to stem the yuan’s decline.

The much strengthened midpoint fixing also limited the downside room for the yuan to sink.

The lower edge of the daily trading band is capped at 7.3591.

“The wider fixing gap implies that the authorities are again showing determination to prevent the yuan from further weakening, with a policy gesture to guide market expectations towards less depreciation,” said Bruce Pang, chief economist at Jones Lang Lasalle.

“But the yuan could see more challenges ahead in the near term, given the uncertainties of the Federal Reserve’s pace (of monetary tightening), the Sino-US policy split, and the souring global risk appetite.”

In the spot market, the onshore yuan opened at 7.3416 per dollar and was changing hands at 7.3245 at 0210 GMT, 205 pips firmer than the previous late session close.

The spot rate hit a low of 7.3510 per dollar last Friday - a level last seen during the global financial crisis - marking a decline of 6.1% since the start of the year.

The offshore yuan followed the trend and rebounded to 7.3419 per dollar as of 0210 GMT, compared with the previous close of 7.3648.

“There will be more focus on whether the PBOC ramps up its defence as spot yuan is on the cusp of making fresh cycle highs, or if it raises the USD/CNY fixing instead and cuts the medium-term lending facility (MLF) rate on Friday again,” analysts at HSBC said in a note.

Some 400 billion yuan ($54.61 billion) worth of medium-term policy loans are due to mature on Friday, when the PBOC is widely expected to roll over.

Separately, currency traders said market participants will pay close attention to a string of economic data due to be released this week, including August credit lending and activity indicators, for more clues to the health of the spluttering Chinese economy.