China’s central bank reinforced its support for the under-pressure yuan by strengthening its daily reference rate for the managed currency by the most since January.
The People’s Bank of China shifted its fixing by 0.1% with traders still on tenterhooks after the yuan sank to its weakest since November on Friday. The currency rose as much as 0.2% in offshore trading in response to the reference rate and traded little changed onshore.
The PBOC faces the difficult task of keeping its currency stable while trying to both maintain supportive monetary policy for a sputtering economy and keep a lid on capital outflows. While a weaker yuan may help the export side of the economy, a sharp slide risks triggering the latter given the negative investor sentiment toward China.
The fixing “reaffirmed that Chinese policymakers are sticking with the same playbook to anchor stable yuan,” said Christopher Wong, a currency strategist at Oversea-Chinese Banking Corp. in Singapore. “This should help to alleviate pressure on Asia ex-Japan FX, including the Korean won and Thai baht, which may have stronger sensitivity to yuan moves.”
Asia currencies which are usually heavily affected by China sentiment advanced after the fixing, with the Australian dollar edging higher and won extending gains. The PBOC’s reference rate limits moves in onshore yuan to 2% on either side.
As a source of stability in the global FX market and an anchor for its regional peers, any signal from officials that they are open to letting the yuan depreciate risks triggering volatility across an array of currencies. On Friday, the yuan dropped the most in more than two months as traders bet that day’s fixing suggested officials were open to such a depreciation.
Before that session, the yuan had largely flat-lined for nearly two months despite pressure from a lackluster economic recovery and weak sentiment towards Chinese assets. Now a rebound in the dollar and a slump in the Japanese yen are also weighing on the yuan, making support by the PBOC more pressing.
“We believe that though short-term factors do favor a slightly weaker yuan, any depreciation that we get will be gradual and controlled,” ING analysts Chris Turner and Lynn Song write in a note. The PBOC has “put that yuan depreciation genie partially back in the bottle.”
While officials are showing support to the currency, the wide gap between US and China interest rates and seasonal factors could still weigh, according to Xiaojia Zhi, head of research at Credit Agricole CIB Hong Kong Branch.
“The PBOC is also not encouraging a big jump in yuan depreciation expectations,” she said. “A gradual return to more flexibility to the yuan is likely as the currency could potentially see some pressures ahead.”
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