SHANGHAI: China’s yuan eased to trade just a fraction from its daily downside limit on Wednesday, maintaining a weak bias despite a persistently firmer-than-expected official guidance fix and signs of tightness in domestic money markets.
The Chinese currency has been hovering near its 16-month lows against the dollar in recent weeks, pressured by a combination of a broadly stronger greenback, falling Chinese bond yields and escalating trade tensions with the US and other economies.
As of 0310 GMT, the onshore yuan was down 0.01% at 7.3317 to the dollar after hitting an intraday low of 7.3319, which was 2 pips away from hitting the weaker end of the daily trading band set by the midpoint fixing.
It also was not far from a 16-month low of 7.3328 hit on Friday.
The offshore counterpart traded at 7.3478 yuan per dollar.
Earlier, the People’s Bank of China (PBOC) set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1883 per dollar, and 1,357 pips firmer than a Reuters’ estimate of 7.3240.
Based on Wednesday’s official guidance, the yuan is allowed to drop as far as 7.3321.
Over and above the appreciation bias in the daily guidance fix, China has stepped up measures ranging from verbal warnings, tweaks to capital flows and issuance of offshore yuan bills to put a floor under the declining yuan.
“The PBOC is taking various measures to slow the pace of depreciation,” Larry Hu, chief China economist at Macquarie, said in a note.
Yuan steadies near 16-month low as PBOC announces record bill sales in HK
“Its strategy seems to be to hang in there until the dollar weakens, i.e. to prioritise yuan stability over other policy goals for the time being.”
Investors are also dialling back bets on near-term rate cuts in China, the derivatives market shows, as expectations grow that policymakers will refrain from easing policy when the yuan is weakening.
Separately, there were signs of liquidity conditions tightening ahead of traditional demand for cash during the week-long Lunar New Year holidays at the end of January. The central bank, however, has been cautious with cash injection due to concerns about the yuan, traders said.
On Wednesday, it injected 959.5 billion yuan via seven-day reverse repos in open market operations, when 995 billion yuan of one-year medium-term lending facility loans and 1.1 billion yuan worth of reverse repos were due to mature. It resulted in a net cash withdrawal of 36.6 billion yuan.
The volume-weighted average rate of the benchmark overnight repo traded in the interbank market, considered the best indicator of general cash conditions, remained elevated at 1.8235% on Wednesday after hitting a seven-month high of 1.9636% a day earlier.
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