SHANGHAI: China’s yuan rebounded on Thursday from a two-year low against the dollar as official guidance was set at a firmer than expected level.

Market participants said the firmer-than-expected guidance could be a sign that authorities are becoming increasingly uncomfortable with rapid losses in the yuan, which has fallen about 1.6% against the dollar so far in August.

Prior to the market opening, the People’s Bank of China (PBOC) set the midpoint rate at 6.8536 per dollar. That was 148 pips or 0.22% weaker than the previous fix 6.8388 and the lowest since Aug. 31, 2020.But analysts and traders said the official midpoint failed to come in as weak as they had projected, and Thursday’s guidance rate was 110 pips firmer than Reuters’ estimate of 6.8646.

“The midpoint was way beyond expectations, my feeling is that the central bank has a firm attitude in defending the currency,” said a trader at a Chinese bank.

China’s yuan weakens as domestic economic woes, hawkish Fed weigh

The firmer-than-expected midpoint lifted the spot market higher.

The onshore yuan rebounded from a two-year low of 6.8704 hit a day earlier to trade at 6.8522 by midday, 57 pips firmer than the previous late session close.

Its offshore counterpart also followed suit, bouncing from two-year lows to hit 6.8588 per dollar at noon.

Several currency traders said the unexpectedly strong midpoint on Thursday could be the PBOC’s pre-emptive move to rein in yuan weakness ahead of the annual central bank gathering in Jackson Hole.

Federal Reserve Chair Jerome Powell is expected to deliver an aggressive tightening message at the annual meeting.

While the slowing Chinese economy has weighed on the local currency, the fall also comes as the US dollar has been buoyed by expectations of aggressive Fed tightening.

The Chinese currency’s rapid fall recently had led to some market speculation that Beijing could allow further yuan weakness to boost its vast export sector.

“The strong RMB fixing shall help dismiss the notion that a weak currency is a policy option to support growth,” said Frances Cheung, rates strategist at OCBC Bank.

Peiqian Liu, chief China economist at NatWest, also believed that the recent yuan weakness has been mostly market-driven.

“We don’t see evidence of competitive devaluation – FX weakness likely benefits only a small proportion of China’s exports in value terms,” she said.

Liu expects the yuan to trade in a range of 6.75 to 6.95 per dollar, with risks of testing the psychologically critical 7 per dollar in coming months.

Sources told Reuters on Wednesday that China’s foreign exchange regulator phoned several banks to warn them against aggressively selling the Chinese currency.