CHINA’S central bank set its daily reference rate for the yuan broadly in line with expectations for the first time in more than a year, a sign it’s loosening its tight grip for the managed currency.
The People’s Bank of China (PBOC) set the so-called fixing at 7.1307 per US dollar on Wednesday (Aug 21), 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 has erased much of the year’s losses against the US dollar in recent weeks as the latter retreated amid expectations of Federal Reserve rate cuts next month. Unwinding of a crowded strategy that involved borrowing the yuan cheaply and selling it against a higher-yielding currency has also helped.
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 US dollar-yuan at 7.10-7 by year-end,” she said.
The PBOC has been gradually weakening the fixing 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 easing as lower interest rates in China would further diminish the yield appeal of local assets versus those in nations with higher rates such as the US.
The need for further support for the economy has intensified amid few signs of growth rebound. Data last week showed China’s fixed-asset investment unexpectedly slowed to 3.6 per cent in the first seven months of the year and home prices last month plunged the most since 2015 on a year over year basis.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
China’s foreign exchange regulator was also said to be gauging 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.
Carry trades
Concern over a “sharper downward move on the back of sizeable long US 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.”
For Kiyong Seong, lead Asia macro strategist at Societe Generale in Hong Kong, muted swings in foreign exchange is a necessity for carry trade. “Even though the global FX volatility has subsided a bit, the market players are unlikely to build up meaningful carry position including short yuan for a while,” Seong said.
The offshore yuan slipped 0.2 per cent to 7.1284 on Wednesday, while the onshore rate was little changed. The daily reference rate limits the yuan’s moves by 2 per cent on either side. BLOOMBERG
