MNI: China Yuan Seen Breaching 7.3, Strengthening Against Basket

China’s yuan will likely test 7.30 against the greenback in the short term should the U.S. dollar index movetoward 107, but continue to depreciate more slowly than other currencies as the People’s Bank of China sets relatively strong fixings and tight offshore liquidity shores up the CNH rate outside the mainland, policy advisors and traders told MNI.

The strong fix has managed to curb onshore CNY depreciation and drive the currency to close near its upper limit on consecutive days this month, a forex trader from a commercial bank based in Shanghai told MNI, though he added that he expected the fix to edge up if the dollar rises further, pushing the yuan towards 7.30.

CNY has traded about 1.9% weaker than the fix throughout this month, near the 2% daily limit in China’s managed float regime, according to MNI calculations. (See MNI: More Yuan Volatility Ahead, PBOC Vigilant)

Expectations of a break through 7.30 are already building. An exporter in an east coast city told MNI his company had built up a stockpile of dollars in expectation of buying yuan more cheaply, after payments for its strong Q1 exports were delayed by Red Sea shipping disruption.

STABLE FIX

The PBOC, in line with its policy of ensuring a stable yuan at a reasonable level, would strengthen its so-called counter-cyclical factor calculation in its onshore CNY fix should the dollar index rise towards its 2023 high of 107, an advisor said. He foresaw a rally back to 7.0 towards the end of the year as the U.S. Federal Reserve finally cuts rates, sending the dollar index back below 100, and fiscal and monetary stimulus boost China’s economy.

So far this year, the central bank has consistently set stronger-than-expected CNY fixes, moving it above 7.10 on April 16 after three weeks at about 7.09. The gap with market estimates reached a record wide 1,597 pips on April 11 and has remained at around 1300 pips since.

Should pressure on the yuan build further, the PBOC has other tools available to unlock dollar liquidity and take the wind out of shorting activity, including a reduction of the forex reserve requirement ratio, hiking the foreign exchange risk reserve ratio for forward trading or an increase in the cross-border financing parameter for cross-border financing, the trader said. (See MNI INTERVIEW2: CNY Strengthens, Third Plenum To Detail Reform)

The PBOC could also increase issuance of central bank bills to drain CNH liquidity if necessary, according to the advisor.

CAUTION ADVISED

The PBOC’s Vice Governor and Director of the State Administration of Foreign Exchange, Zhu Hexin, told reporters on April 18 the Bank will work to stabilise market sentiment and correct any pro-cyclical behaviour in the foreign exchange market.

But the advisor cautioned against too much rigidity in the fix, and against allowing concerns over a weakening yuan and capital outflows to restrain the extent of policy easing required to support China’s economy. Pointing to the yuan’s appreciation against other currencies in its trade-weighted basket, he said permitting a broader band of currency trading and a cheaper yuan would boost manufacturing exports, and added authorities could counter excessive outflows using tightened capital controls if necessary.

A net CNY6.7 billion left China’s A-share equity market last week, the third consecutive week of outflow. The CFETS Weekly RMB Index, gauging the yuan against the currencies of China's 24 major trading partners, stood at 100.7 on March 19, the highest since October 2022.