[1/2]A staffer counts 100 Chinese yuan banknotes at a bank in Hefei, Anhui province, January 21, 2013. Portal/Stringer/File Photo
- State Banks Sell Dollars for Yuan – Market Sources
- PBOC sets onshore band tighter than expected
- The yuan recovers, dragging stocks and Asian currencies with it
SHANGHAI/BEJING, June 27 (Portal) – China on Tuesday set a tighter-than-expected trading range for its currency and state banks sold the dollar against the yuan, market sources said. This is the strongest sign, but authorities are increasingly uncomfortable with his acceleration sled.
The yuan has fallen about 4% against the dollar in two months as falling consumer confidence and a sluggish real estate market have weakened the momentum of the post-pandemic recovery. The price rallied about 0.4% on Tuesday, its best rise in nearly two weeks.
State banks were selling dollars to buy yuan in the offshore spot market, according to four people familiar with the business, and the currency appeared to be nearing the psychologically important level of 7.25 per dollar, two of the people said.
According to two other traders, banks were also active late Monday when they bid the yuan sharply higher through the onshore close, affecting the central bank’s official setting of the yuan midpoint the next day.
On Tuesday, the People’s Bank of China (PBOC) set the middle of the band even tighter-than-expected, deviating significantly from forecast models since May.
Analysts said that overall the moves showed official unease about the yuan’s downward momentum and that they may slow, but perhaps not halt, the decline given the bleak economic outlook.
“They are sending more signals now that they are uncomfortable…they want to slow the yuan weakness,” said Moh Siong Sim, currency strategist at Bank of Singapore. “The speed was too high for her liking.”
The yuan ended Monday at a seven-month low of 7.2425 per dollar and traded at 7.2105 on Tuesday afternoon.
“The 7.25 level remains an important threshold,” said one of the market sources, adding that a break of this level could quickly plunge the yuan to lows last seen in 2022.
All sources spoke on condition of anonymity as they are not authorized to speak publicly about trade deals. UBS said in a statement that its trading arm saw a keen interest from banks in premarket deals to source dollars via buy and sell currency swaps, and said authorities may have made efforts to neutralize the impact of their spot interventions .
State banks usually act on behalf of the country’s central bank in the foreign exchange market, but they could also trade for themselves or their clients.
BACK FOOT
The pullback comes as investors are wary of China and data shows China’s vaunted recovery is faltering. Still, the faltering recovery has fueled expectations that stimulus measures could help ease concerns about growth.
Hong Kong stocks (.HSI) and the Australian dollar rallied sharply in line with the yuan on Tuesday.
Analysts said measures to stem the yuan’s downturn are not yet as decisive as last year, when regulators introduced measures to boost capital inflows, but may be enough to slow sales.
In November, the currency hit a 14-year low at 7.3280 per dollar, while the offshore yuan hit a record low of 7.3746.
“It means markets will be more cautious about driving the dollar/offshore yuan much, much higher from here,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.
That may at least act as a brake if the Chinese economy – or the prospect of further rate cuts – prevents the yuan from falling further.
“We need to think about the likelihood of further easing,” said Rob Carnell, ING’s regional head of research for Asia Pacific.
“What we’ve seen is just the first iteration of the rate cuts we’re going to get. We’ll be getting many more of these over the next few months,” Carnell said.
“That must keep the yuan on the defensive.”
Reporting from Shanghai and Beijing Newsroom, Ankur Banerjee, Tom Westbrook and Rae Wee in Singapore; Edited by Vidya Ranganathan, Kim Coghill and Jacqueline Wong
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