PBOC Headquarters Building in Beijing as China Economy Gloom Worsens With Weak Consumer Spending Data
BEIJING: Traders will keep a closer eye than usual today on China’s daily yuan reference rate, looking for signs of official pushback after the currency weakened toward a no-go area last week.
After the yuan slipped to within a whisker of its permitted trading range against the US dollar last Wednesday, before a four-day holiday weekend, the so-called fixing may signal whether Beijing will support the currency more vigorously or allow a moderate depreciation.
As a regional currency anchor, any message which triggers yuan volatility can quickly spill over into other markets.
A figure significantly stronger or weaker than 7.0950 per US dollar – broadly the last fixing level – would send respective signals of support or tolerance for a lower yuan, while something close to it would imply that stability is key.
China manages its currency onshore by setting a daily reference rate against the US dollar at 9.15am local time, around which it is then permitted to trade in a 2% range.
China’s policymakers have always been vigilant of currency pressure which can spill over to local stocks and bonds, despite the fact that the country’s export engine would benefit from a weaker yuan. Stability is prized because rapid yuan drops can also lead to a vicious cycle of capital outflows and exacerbated losses.
But last month a surprise weaker-than-expected fixing unleashed a slide in the yuan and pulled down its Asian peers along the way.
A series of stronger fixes followed, which slowed yuan declines but at the cost of sending mixed signals to investors on Beijing’s currency intentions.
Now, resilient US economic data and bets the US Federal Reserve will deliver fewer rate cuts than previously priced in are lending support to the US dollar. That’s also weighing on the yuan.
What China “discovered is that there was a heck of a lot more depreciation and selling pressure under the surface than they probably anticipated,” said Richard Franulovich head of foreign-exchange strategy at Westpac Banking Corp.
“This is what happens periodically when you have a managed currency.”
While the People’s Bank of China (PBoC) has “plenty of firepower” to manage the yuan, the macro-economic environment points to more weakness as the year progresses, he added.
When asked what the mood was like on the trading floor at fixing time, one StoneX Financial Pte trader’s response was “anxious”.
“After similar fixes people get numb and it suggests PBoC is happy with the status quo,” said Mingze Wu, a foreign-exchange trader at the firm in Singapore.
“But if the US dollar-yuan fix drops another big figure lower, then I think panic will set in.” — Bloomberg
