Yuan hits 4-week high as X-factor revived for fixing

THE yuan finished yesterday afternoon trade at a near fourweek high to the dollar after the central bank revived a “counter-cyclical factor” in its daily fixing to support the currency, halting a record 10-week slide that rattled global markets.

The announcement was seen as the latest signal from the People’s Bank of China that is not comfortable with further depreciation in the yuan.

Yesterday’s domestic closing price was the strongest since August 1. Spot yuan opened onshore trade at 6.8080 per dollar and closed domestic trade, at 0830 GMT, at 6.8171, or 19 pips firmer than the previous late night session close.

“Given China has drawn the line in the sand clearly, the outlook of the yuan may depend on China’s economic fundamentals other than the dollar trajectory,” Tommy Xie, economist at OCBC in Singapore, said in a note.

The PBOC said it was adjusting how the yuan’s official midpoint was calculated to keep the currency more stable amid dollar strength and trade tensions.

The PBOC’s move “validates our views that yuan devaluation is not a weapon of the trade war,” Mizuho Bank analysts said in a note.

“It also resonates with our ‘7-3’ stability threshold hypothesis, which refers to not breaching 7 for dollar-yuan and FX reserves not falling below US$3 trillion.”

Prior to the market opening yesterday, the PBOC lifted its official yuan midpoint more than expected to 6.8508 per dollar, 202 pips, or 0.3 percent, firmer than the previous fix of 6.8710 on Friday.

The guidance rate was 127 pips higher than Reuters’ estimate of 6.8635 per dollar.

The currency firmed initially in spot trade before swinging between gains and losses.

The offshore counterpart rose to a high of 6.7818, its strongest since July 31. It traded at 6.8047 as of 0830 GMT.

Traders said the policy move had triggered some dollar selling since Friday night, but gains in the Chinese currency were capped by bargain hunting for cheaper dollars yesterday as many saw strong resistance at 6.8 per dollar for now.

The PBOC launched the “X” factor in May 2017 when the yuan was firming against a weaker dollar.

The yuan had appreciated rapidly in the six months after the counter-cyclical factor was first introduced, said Larry Hu, head of greater China economics at Macquarie in Hong Kong.