HONG KONG: China’s yuan firmed against the dollar on Friday from a more than nine-month low earlier in the week after the central bank set the daily fixing much higher than expected, keeping the currency buoyant and trading in a tight range.
The People’s Bank of China set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.2006 per US dollar prior to market open, firmer than the previous fix 7.2076 and more than 1,000 pips stronger than Reuters’ estimate - the largest deviation seen this year.
The higher-than-expected fixing showed the central bank is focused on ensuring the yuan does not fall too low versus the dollar, analysts said. Market participants widely take it as an official sign of authorities’ rising discomfort with the yuan’s weakness.
The spot yuan opened at 7.2721 per dollar and was changing hands at 7.2740 in the early trading session, 148 pips stronger than the previous late session close and 1.02% weaker than the midpoint.
The offshore yuan was trading 0.20% weaker than the onshore spot at 7.2883 per dollar.
China will also prevent overshooting risks of the yuan exchange rate and fend off systemic financial risks, the central bank said in its second-quarter monetary policy implementation report on Thursday.
Policy makers have vowed to ensure a stable yuan exchange rate.
The support from the central bank in the daily fixing, through a tweak known as the counter-cyclical factor, also came after Reuters reported on Thursday that China’s major state-owned banks were seen busy selling dollars to buy yuan in both onshore and offshore spot foreign exchange markets.
Taken together, Citi expects more tools will be redeployed by the central bank to further rein in the yuan’s slide.
“This would be a step up from using the counter-cyclical factor in the CNY fix. The foreign exchange reserve requirement ratio was last cut in September 2022.
However, we think authorities are concerned about the pace of depreciation rather than the direction itself,“ said Citi analysts in a client note on Friday.
Both MUFG and HSBC expect the yuan to reach 7.1 per dollar by end of 2023, while BNP Paribas expects the yuan to still strengthen to 6.95 per dollar.
The dollar index fell to 103.252 from the previous close of 103.572.
Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan’s value, traded at 7.0698, 1.85% away from the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate.
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