China’s yuan slips from 32-month high as PBOC signals caution

SHANGHAI: China’s yuan edged lower against the dollar on Wednesday, retreating from a 32-month high, after the central bank unexpectedly weakened its daily midpoint guidance.

Traders considered the move to keep it on the weaker side of the 7-per-dollar level significant, as the yuan has strengthened 0.4% year-to-date. It gained 4.5% versus the dollar last year to post its best annual performance since 2020.

Prior to the market opening, the People’s Bank of China (PBOC) set the midpoint rate at 7.0014 per dollar, 8 pips softer than the previous setting and 436 pips weaker than a Reuters estimate of 6.9578.

 The spot yuan is allowed to trade at a maximum of 2% on either side of the fixed midpoint each day.

Markets had widely expected the central bank to strengthen the midpoint to reflect dollar weakness overnight following a broad selloff in US assets, traders said.

“The marginally higher USD/CNY fixing this morning drew slight market disappointment against the continuation of recent lower USD/CNY trend,” said Wee Khoon Chong, APAC macro strategist at BNY.

“We see a good chance for the USD/CNY fixing to break below 7.00 and eventually a convergence between the yuan fixing and spot.”

Chong said he maintains a positive view of the yuan on the back of capital inflows and a resilient domestic equity market.

The central bank has been gradually strengthening its daily official guidance, though it has been at levels weaker than market projections since November, a move that market participants believe is aimed at keeping the currency stable.

Traders are closely watching whether the central bank will allow the official midpoint to strengthen past the key 7 level, which traders say would be seen as an official “nod” for further yuan appreciation.

“The PBOC may continue to check the pace of yuan appreciation in the face of a fragile domestic demand, still facing lingering deflation risks,” Maybank analysts said in a note.

In the spot market, the onshore yuan was 0.08% weaker at 6.9656 per dollar as of 0334 GMT, while its offshore counterpart traded about 0.06% softer in Asian trade at 6.9618.

The onshore yuan hit a high of 6.9570 at one point on Tuesday, the loftiest level since May 2023.

Major state-owned banks repeatedly bought dollars in the spot market to slow the yuan’s appreciation, multiple traders said, helping to stabilise the market.

In global markets, the dollar languished near three-week lows against the euro and Swiss franc after White House threats over Greenland triggered a broad selloff in US assets, from the currency to Wall Street stocks and Treasury bonds.