The Business Times

Yuan’s declines slowed by firmer-than-expected fixings, fuelling talks of PBOC support

Published Thu, Sep 1, 2022 · 05:52 PM

CHINA’S yuan traded around the key 6.9-per-US dollar level and finished the domestic session slightly weaker on Thursday (Sep 1), as a persistently firmer-than-expected official guidance rate offset broad US dollar strength in global markets.

China’s central bank has lifted the official fixing by more than market projections for the seventh consecutive trading day, prompting some market speculation that the People’s Bank of China (PBOC) may have revived the counter-cyclical factor to stem further yuan weakness.

Prior to market opening, the PBOC set the midpoint rate at 6.8821 per US dollar, 85 pips firmer than the previous fix of 6.8906. It was 89 pips stronger than a Reuters estimate of 6.8910.

“Recent stronger-than-expected yuan fixings are a clear signal from the Chinese authorities of their intent to dampen depreciation pressure,” said Khoon Goh, head of Asia research at ANZ.

“With the 20th National Congress of the Chinese Communist Party commencing on Oct 16, and given the economic and geopolitical challenges that the government faces, we believe the authorities will want to ensure exchange rate stability in the lead-up to the event.”

Recent actual fixings were rather close to our estimates, if we turned on the counter-cyclical factor in our model, analysts at CICC said.

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“Against such a backdrop, we believe with recent pro-cyclical behaviours in the yuan market, some midpoint contributing banks may have proactively adjusted their quotation models based on their judgements of market conditions,” they wrote in a note.

China first introduced the counter-cyclical factor in 2017 in what regulators said was an effort to better reflect market supply and demand, lessen possible “herd effects” and help guide the market to focus more on macroeconomic fundamentals.

It has since adjusted its methodology a number of times to cope with market conditions and keep the currency stable before last suspending it in October 2020, when the yuan rose sharply.

Three banking sources with direct knowledge of the matter said contributors had not received phone calls or guidance from regulators to tweak their models.

Any modifications to revive the counter-cyclical factor, which is the adjustment that contributing banks make to the daily reference rate the PBOC uses to guide the yuan, should be voluntary, said 1 of the sources.

The PBOC did not immediately respond to a Reuters request for comment.

The onshore yuan finished the domestic trading session at 6.8990 per US dollar, down 72 pips from the previous late night close of 6.8918.

The slight weakness was a reaction to the US dollar rally in overseas markets, traders said, noting investors had refrained from testing lows in the Chinese currency because the authorities seemed to have shown discomfort over the pace of yuan declines.

The Chinese currency lost about 2.2 per cent against the US dollar in August, booking its worst monthly performance since April and pressured by a buoyant US dollar, domestic economic slowdown and market expectations of aggressive US interest rate rises.

Expectations for another 75-basis-point US rate hike at the Federal Reserve’s September meeting are rising on the back of solid economic data, with Fed funds futures last pointing to a 75 per cent chance of such an increase.

“Some appropriate yuan depreciation within a controllable range is good for exports,” Wang Tao, chief China economist at UBS, told reporters.

Wang expects the yuan to breach the psychologically critical level of 7 per US dollar sometime in the remainder of this year before finishing at around its current 6.9 at the end of December. REUTERS

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