China sets stronger-than-expected yuan fix amid currency drop

CHINA set its reference rate for the yuan at a stronger-than-expected level as the nation’s widening monetary policy gap with the US drove the currency to the lowest in 2 years.

The People’s Bank of China (PBOC) set the fixing at 6.8536 per dollar, 120 pips stronger than the average estimate in a Bloomberg survey of analysts and traders, and the strongest bias since February 2020. The move came after the onshore yuan touched a fresh 2 year low Wednesday (Aug 24).

“This is clearly a signal from the PBOC to slow the pace of yuan depreciation,” said Peiqian Liu, chief China economist at NatWestGroup. “These moves suggest subtle intervention to prevent further, rapid weakness,” according to Liu who sees the yuan trading in a range of 6.75-6.95 per dollar until year-end.

The Chinese currency has come under pressure after the PBOC lowered a key policy rate this month to boost an economy battered by Covid restrictions. Traders are betting that Federal Reserve chair Jerome Powell will make hawkish comments in his speech at Jackson Hole on Friday, solidifying bets for aggressive rate hikes to tame inflation. That’s likely to worsen capital outflows from China as the nation’s monetary policy diverges further from the US.

A report from Reuters cited unnamed sources saying China’s State Administration of the Foreign Exchange phoned several banks on Wednesday to warn them against “aggressively selling” the yuan. The report cited the regulator saying it had not seen financial institutions “unreasonably buying large amounts of foreign exchange”.

The PBOC had largely refrained from pushing back against the currency’s weakness until this week. On Wednesday it set the currency fixing 37 pips stronger than the average estimate a Bloomberg survey.

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“The fixing today and yesterday can be interpreted as the PBOC sending more signals that they are becoming less tolerant of the dollar-yuan up-move,” said Eddie Cheung, senior emerging markets strategist at Credit Agricole CIB in Hong Kong. “I don’t think the PBOC ruling out further depreciation in the yuan but it’s another way in which they are slowing it down so we don’t get extreme volatility,” he said

The onshore yuan rose 0.1 per cent to 6.8505 per dollar at 9:54 am in Shanghai after falling to 6.8704 in the previous session, the lowest since August 2020. BLOOMBERG