SHANGHAI/SINGAPORE: China’s yuan pared earlier losses against the dollar on Thursday, supported by firmer-than-expected central bank guidance and tight liquidity in the offshore market.
Prior to market 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 a week-high of 7.1874 per dollar, 20 pips firmer than the previous fix of 7.1894.
But the central bank also continued its months-long trend of setting the official guidance rate at much stronger levels than what market participants had projected, which traders interpreted as an attempt to slow yuan depreciation.
Thursday’s official midpoint was 910 pips firmer than Reuters’ estimate of 7.2784.
The onshore yuan opened at 7.2621 per dollar, weakened to a low of 7.2808 before making up lost ground and changing hands at 7.2733 by midday, 3 pips weaker than the previous late session close.
“This fix is sufficiently strong to drive the message of yuan support on top of the CNH funding squeeze as well as other measures,” Maybank analysts said in a note.
Offshore yuan liquidity has shown signs of tightness this week, with costs of borrowing the yuan in Hong Kong rising across the board. Surges in the yuan’s funding costs also made it more expensive for some investors to short the yuan.
Hong Kong’s offshore yuan one-week CNH HIBOR, a gauge that measures offshore yuan liquidity conditions, jumped to 5.37136%, the highest since Feb 2022.
Meanwhile, The PBOC was also set to ramp up bill sales again in Hong Kong next week, it said on Wednesday, a sign for many investors that authorities are keen to steady a weakening yuan.
Separately, some analysts said markets will shift their attention to major Chinese indicators, including industrial production, retail sales, fixed asset investment, and property investment, due on Friday for more clues on the health of the broad economy.
By midday, the global dollar index fell to 104.611 from the previous close of 104.766, while the offshore yuan was trading at 7.275 per dollar.
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