SHANGHAI: China’s yuan strengthened on Tuesday after the central bank stepped in to slow the currency’s sharp falls by easing banks’ foreign exchange holding requirements.
Worries over a darkening domestic economic outlook caused by strict COVID-19 lockdowns in major cities, and vanishing yield premiums on Chinese assets have driven a slump in the yuan against the dollar over the past month.
The yuan has also weakened against other major peers, with Reuters calculations putting the currency’s trade-weighted basket at a two-month low of 103.15 on Tuesday morning. While the People’s Bank of China’s (PBOC) decision to cut banks’ foreign exchange reserve ratio late Monday put a floor under the currency, traders said that the factors driving its recent declines still remain.
“The yuan may stabilize a bit in the short term, but it’s hard to reverse market expectations. The key is to stabilise growth expectations,” said a trader at a foreign bank.
Analysts at Goldman Sachs suggested that the PBOC’s action was focused on managing those expectations, as the actual impact on foreign exchange liquidity would be small.
“This move sends a strong policy signal that (the) PBOC is getting uncomfortable with the rapid depreciation,” they said, noting that the bank’s level of concern has previously been unclear.
Commerzbank analysts said the cut aimed to lower US dollar funding costs.
China’s yuan drops to one-year lows, extending losses
“As a result, the long USD-CNY positions will be less attractive as the traders have to pay higher carry costs. This also suggests that the Chinese central bank intends to slow the depreciation pace of the Chinese currency,” they said.
After the onshore yuan finished its domestic session at a one-year low of 6.5544 per dollar on Monday, the PBOC set Tuesday’s midpoint rate at 6.559, its weakest in more than a year but in line with market expectations.
Spot yuan opened at 6.5620 per dollar and firmed to 6.5317 around midday, nearly 300 pips stronger than Monday’s late session close and on track for its biggest percentage gain since October.
The offshore yuan, bounced from early weakness to firm to 6.5566 per dollar, from a close of 6.5699, while the spread between the onshore and offshore yuan narrowed. Analysts have in recent weeks flagged a widening gap with the softer offshore yuan as an indication of market expectations of further yuan weakening.
The PBOC on Tuesday said it would step up “prudent” monetary policy support to the economy.
The bank’s comment comes ahead of this week’s meeting of the politburo, China’s highest decision-making body, which is being closely watched for more signs of economic support.
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