PBC sets yuan midpoint significantly high
Move aims to steady currency amid US trade war
China’s central bank raised its daily guidance rate for the yuan by the most in nearly 15 months on Tuesday as part of its latest move to put a floor under the currency as a trade war with the US grinds on.
But the near 0.7 percent jump in the official midpoint fixing sparked more corporate demand for cheaper dollars, capping the yuan’s gains in the spot market.
The People’s Bank of China (PBC), the country’s central bank, confirmed market suspicions on Friday by announcing it had started changing the way it calculates the midpoint for August, in a sign authorities are growing wary of letting the yuan weaken further after a record 10 straight weeks of losses.
But market watchers say the yuan will continue to face depreciation pressure as the China-US trade battle deepens.
Prior to the market opening on Tuesday, the PBC lifted its official yuan midpoint to 6.8052 per dollar, 456 pips, or 0.67 percent, firmer than the previous fix of 6.8508 and largely matching market forecasts.
The move in Tuesday’s official guidance rate was the biggest one-day strengthening in percentage terms since June 1, 2017.
The guidance rate was 4 pips lower than Reuters’ estimate of 6.8048 per dollar.
Market watchers believe the re-introduction of the “countercyclical factor” in the PBC’s calculations is largely aimed at steadying the currency, not turning it around.
“It does not make sense to see a much stronger yuan from both the economic and trade war perspectives. In our view, the yuan’s weakness is justified as the economy is still struggling between growth, debt and leveraging,” Zhou Hao, analyst at Commerzbank in Singapore, said in a note.
Recent easing measures in monetary policy also imply a weaker bias for the currency, he said, and added it would not be in China’s interest to engineer a firmer yuan while the US trade dispute drags on.
The onshore yuan opened at 6.8128 per dollar, trading around at 6.8017 during the afternoon session.