China’s yuan halts rally after PBOC cuts dollar-buying costs

SHANGHAI: A long rally in China’s yuan was halted on Friday after the authorities made their strongest push back yet on months of gains, holding the currency’s trading band steady and tweaking a policy to cut the cost of buying dollar forwards.

The onshore yuan snapped a 10-day winning streak and fell about 0.15% at the market open to 6.86 per dollar.

 The People’s Bank of China (PBOC) said it would cut to zero from 20% the risk reserves that financial institutions must set aside when purchasing foreign exchange via currency forwards, effective March 2.

Offshore, the yuan weakened more than 100 pips following the announcement, slipping past 6.85 per dollar.

Onshore yuan was last trading at 6.8584 as of 0133 GMT, 84 pips lower than the previous late session close.

The adjustment reverses the PBOC’s September 2022 decision to raise the reserve ratio in an effort to curb rapid yuan losses and capital outflows at the time.

“The central bank has always been cautious about adjusting the FX risk reserve ratio,” said Liu Yang, general manager of the financial market business department at Zheshang Development Group.

 Liu said the move would unlock some pent-up demand for dollar purchases via forwards. It also signalled the PBOC sees limited downside risk for the yuan and believes the currency still has room to appreciate, he added.

The yuan has risen nearly 1% against the dollar over the past three days after the Lunar New Year break, underpinned by corporate demand for the currency and firm export expectations as markets bet a US Supreme Court ruling against President Donald Trump’s tariffs could bolster Chinese exports.

 The Chinese currency posted its biggest annual gain against the dollar since 2020 last year, strengthening past the psychologically important 7-per-dollar level.

In another sign the authorities may be seeking to slow sharp yuan gains, the PBOC set the midpoint rate at 6.9228 per dollar prior to market opening, coming in 800 pips weaker than Reuters’ forecast - the largest deviation on record. The spot yuan is allowed to trade a maximum of 2% on either side of the fixed midpoint each day.

The offshore yuan traded at 6.8546 yuan per dollar, down about 0.12% in Asian trade.

The dollar index, which measures the greenback against a basket of six currencies, was 0.034% higher at 97.76.