SHANGHAI: China’s yuan held steady against the dollar on Monday as the central bank’s latest move to take more control over interest rates blunted corporate demand for foreign exchange.
China’s central bank said on Monday it would start conducting temporary bond repurchase agreements or reverse repos, a move seen by market participants and traders as to give the bank more leeway to manage cash conditions and interest rates amid hot demand for bonds.
Monetary policy divergence with other major economies, particularly the United States, has been one of the key factors weighing down the Chinese currency over the past few years.
The central bank’s recent moves, including possible selling of treasury bonds, could prevent the yield gap from widening further.
China’s one-year dollar/yuan swaps, a gauge that measures market expectations of yield premium between the world’s two largest economies, bounced on Monday.
At 0230 GMT, the yuan was down 4 pips, or 0.01%, at 7.2689 to the dollar after trading in a range of 7.2658 to 7.2695.
The yuan has weakened 2.3% against the dollar so far this year. It has been under pressure since early 2023 as domestic woes around a moribund property sector, anaemic consumption and falling yields drive capital flows out of yuan, and foreign investors stay away from its struggling stock market.
China’s yuan hovers near 1-month low as investors await economic data
“Higher local rates may also mean some increased risk of a reversal in the yuan, which has also been depreciating steadily,” analysts at Goldman Sachs said in a note. “But ultimately we continue to expect a gradual depreciation given the still wide interest rate differential with the US and growing tariff risks as we get closer to the US elections.”
They revised their forecasts for the yuan lower to 7.35, 7.40 and 7.40 per dollar in three, six and 12 months, respectively, from 7.30, 7.25 and 7.20 previously.
Prior to the market opening, the People’s Bank of China (PBOC) set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1286 per dollar, and 1,354 pips firmer than a Reuters’ estimate.
The central bank has been gradually lowering the yuan’s mid-point fixing rate since June, albeit at levels firmer than market projections, signalling that authorities are allowing measured pace of yuan depreciation to cope with a strong dollar, traders and analysts said.
It is an “attempt to let out some depreciation pressure,” said Christopher Wong, FX strategist at OCBC Bank.
“We believe the intent is not to pursue a big bang approach so as not to undermine sentiments for fear of accelerating outflows.”
Seasonal FX demand remained heavy, as overseas-listed Chinese companies need to make FX conversion for their dividend payouts to overseas shareholders, currency traders said.
The offshore yuan traded at 7.2894 yuan per dollar, down about 0.01% in Asian trade.
The dollar’s six-currency index was 0.048% lower at 104.9.
In the forwards market, three-month yuan was quoted at 7.1966, 723 pips stronger than the spot rate.
Three-month CNH forwards were quoted at 7.1966 per dollar.
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