MNI: PBOC Seen Capping Yuan Fixing At 7.10 After Rally

The People’s Bank of China is likely to keep its onshore yuan fixing at levels no stronger than 7.10 to the dollar in coming weeks to limit volatility and cap further sharp appreciation after the currency’s significant rally over recent days, traders, advisors and forex experts told MNI.

Onshore and offshore yuan rates jumped 1,654 and 2,127pips over the past two weeks, driving CNY to around 7.11, the strongest in five months, and catching a market biased towards short positions on the Chinese currency off guard. The rally came as global carry trades unwound in the wake of rising expectations for U.S. Federal Reserve easing and as the Bank of Japan raised rates, and followed after weeks of state-bank USD selling amid the PBOC's drive to slow yuan depreciation towards 7.30.

The central bank may also have dipped into its forex reserves to defend the yuan, one forex expert said, noting the 700-pip surge in CNH on July 25, the biggest daily appreciation since September 2023. Exporters fearful of a prolonged yuan rally have also started to convert dollars to CNY in recent days, he added. (See MNI INTERVIEW: China Yuan To Find Support in H2)

ADJUSTED ESTIMATES

One trader based in Hong Kong told MNI he had adjusted his estimated yuan-dollar range for the rest of 2024 to between 7.0-7.3, from his previous 7.2-7.3. But it is unlikely the yuan will strengthen much more for now, he added, pointing to how the PBOC had kept its daily fixing at 7.13 despite a rally in spot rates – a sign that it would act to contain excessive appreciation – and as the dollar stabilises.

On the other hand, the currency pair is unlikely to rise back above 7.3 in the short term, he added, noting that when that level was approached in recent weeks the PBOC tightened offshore yuan liquidity to raise the cost of shorting. (See MNI: PBOC Seen Capping Further Sharp Yuan Weakness)

A trader in Shanghai agreed, saying that while the yuan may trade in a wider range for the rest of the year, and could preserve a strengthening bias until the Fed cuts rates in September, it is hard to see persistent strength in the Chinese currency at a time when PBOC monetary policy tilts towards easing and the economic recovery has not seen a strong upward trend.

CARRY UNWIND

As with the gains in the yen, the yuan’s appreciation has largely come from a carry-trade unwind, given China’s low interest rates and exchange rate volatility, the Shanghai trader said.

The gap between the official CNY fixing and market pricing narrowed to 93 pips on Tuesday, the smallest in over a year, as yuan strength eased the pressure on the PBOC to defend the currency.

The central bank may make less use of the so-called counter-cyclical factor in its fixing calculations, an advisor familiar with forex operations said, adding that the PBOC will regard a stable exchange rate as more important than appreciation for the yuan at a time of global market volatility and geopolitical uncertainty.

A big gain could also set the currency up for a sharp correction should the Fed keep rates unchanged in September or November’s U.S. elections unsettle investors, the advisor added.

Domestic fundamentals, including export performance and economic growth, do not support an overly strong yuan, he continued, while excessive strength could also prompt potentially destabilising inflows of hot money. The 7.10 level against the dollar is likely to see strong support, the advisor added.

USDCNH broke 7.10 on Monday, but quickly retraced. The PBOC set the CNY fixing higher at 7.1386 on Wednesday, compared with Tuesday's 7.1318.