MNI: PBOC Restarts Counter-Cyclical Factor In Yuan Fix-Traders

The People’s Bank of China appears to have reintroduced the so-called “counter-cyclical factor” in calculations of its daily yuan fixing in response to recent depreciation, forex traders and advisors told MNI, adding that any weakness in the currency is likely to be capped at 7.30 to the dollar for the remainder of the year.

The yuan faces potentially bigger downward pressures in 2025, with U.S. President-elect Donald Trump set to impose heavy tariffs on Chinese goods, they said.

The central bank set a USDCNY mid-point price at 7.1991 on Wednesday, much lower than market estimates of 7.2436 and the biggest gap since Aug 5, they noted. The gap had remained under 100pips since the middle of August, which markets had interpreted as a sign that the PBOC had stopped using the counter-cyclical factor while the yuan was on a strengthening trajectory. (See MNI INTERVIEW: PBOC To Cut Rates Further, Target 2% CPI)

The much stronger-than-expected fixing price came after the offshore USDCNH rate rose rapidly above 7.25 on Tuesday, the highest since Aug 2, during a broad dollar rally, a trader based in Hong Kong told MNI. Some traders had expected the central bank to act sooner, after the onshore USDCNY rate broke 7.20 on Monday, but it allowed a fixing of 7.19 on Tuesday, the softest in a year, he added.

This unexpected tolerance of volatility earlier in the week contrasted with the PBOC’s actions in June and July, when the yuan also came under significant pressure, when it kept the fixing price stronger than 7.15. This time the PBOC seems to have drawn the line at 7.20, the trader said.

FX FLEXIBILITY

Allowing flexibility in the exchange rate helps to alleviate external pressures and strengthen the autonomy of monetary policy, an advisor said, noting that the PBOC reiterated the need for flexibility in its latest monetary policy report and removed the phrase “firmly countering pro-cyclical behaviour”.

However, while tolerance for depreciation is increasing, some levels, such as 7.3, may still serve as “key thresholds,” he said.

A trader in Shanghai told MNI that there is currently no sign of one-way trades skewed to bets on a weaker yuan, noting that recent interbank forex trading has been dominated by foreign exchange settlement, as companies converted foreign currency at favourable rates.

It is still possible that year-end settlement flows could boost the yuan, the Shanghai trader said, though he added that while a significant depreciation seems improbable during what remains of 2024, the “Trump trade” was likely to continue to boost the dollar. USDCNY is likely to trade within a range of 7.10-7.30 for the rest of the year, though larger risks may arise in 2025, he said. (See MNI: PBOC Reduces Yuan Support, Wide Volatility Band Ahead)

The advisor expressed concern that China could face capital outflows next year as U.S. Treasury yields remain relatively high. However, the effects of China’s growth-stabilising policies are beginning to take hold, and signs of economic stabilisation beginning to emerge, which should provide some support for the yuan, he said.

Based on the 2% daily trading band around the central parity rate, the upper limit for the USDCNY spot rate in intra-day trading is now about 7.33, the Hong Kong trader said. The possibility of breaking that level cannot be ruled out next year in the event of a tariff war, he added.