China set its daily reference rate for the yuan broadly in line with expectations for the first time in more than a year, signaling its comfort with current currency levels following a rebound.
The People’s Bank of China set the so-called fixing just seven pips away from the estimates in a Bloomberg survey of analysts and traders. The gap was the smallest since June 2023.
The yuan erased much of the year’s losses against the dollar as the latter retreated on bets for Federal Reserve rate cuts next month and as trades involving borrowing the yuan cheaply and selling it against a higher-yielding exchange rate were unwound. Analysts expect the PBOC to clamp down on any sharp yuan gains that could hurt exporters and impede economic recovery.
The move signals reluctance of letting the yuan strengthen too much, said Becky Liu, head of China macro strategy at Standard Chartered Bank. “We currently see dollar-yuan at 7.10-7 by year end,” she said.
China had been preventing the yuan from sliding rapidly for most of the past year with the so-called fixing, as its bleak economic prospects and a wide yield discount to the US weighed on the currency. Dollar sales by state banks were also instrumental in supporting the exchange rate.
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However, the PBOC started gradually weakening the fixing a few months ago amid calls from former officials to relax its control in order to open room for more easing. A weak yuan had been an impediment for further central bank stimulus as lower yields in China would further diminish the appeal of local assets versus those in other nations.
While concerns over a sluggish economy remain a drag on the yuan, the dollar’s decline has put it on track for a back-to-back monthly gain for the first time this year. Traders have turned increasingly concerned about hedging for the yuan’s rise than a fall.
Even though the onshore yuan has risen more than 1% this month, its gains are small compared with the Indonesian rupiah and Malaysian ringgit which have advanced around 5% in the same period.
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Rally Risk
A potential victory of Donald Trump in the November US election may weaken the yuan due to possible imposition of higher tariffs, said Kiyong Seong, lead Asia macro strategist at Societe Generale SA in Hong Kong. “If the yuan has rallied significantly before the election, the resulting FX volatility is likely to be larger,” he said.
“The PBOC fixing intervention will play out from both ways to focus on FX volatility,” he said.
China’s FX regulator was already said to be taking precautions, as it sought to gauge the impact of a stronger yuan on the nation’s exporters. The country has been relying on exports to pull itself out of an economic slowdown and the questions from authorities may indicate caution over the yuan’s latest advance.
Concern over a “sharper downward move on the back of sizable long-dollar positions at Chinese exporters could prompt further actions to tame the yuan’s appreciation,” said StanChart’s Liu. “I don’t think the carry trade positioning is very heavy now as most of those trades have been unwound.”
The offshore yuan slipped 0.1% to 7.1271 per dollar on Wednesday, while the onshore rate was little changed. The fixing, which was set at 7.1307, limits moves of the domestically traded currency by 2% on either side.
“We do not rule out further yuan strengthening on the pending FX settlement and waning seasonality of dividend payouts flow amid the dollar selloff,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank. “We remain cautious on the yuan depreciation risk due to weak China fundamentals and uncertainties over the US elections by year-end.”
