MNI: PBOC Seen Tolerating USDCNY Through 7 If Steady Glide

Beijing traders and analysts anticipate the People’s Bank of China is likely to stay on the sidelines should the yuan, largely stable against most other currencies, drift steadily below the key 7.0 level to the U.S. dollar - unless the authorities see clear one-way sentiment and shorting of the yuan building.

Expectations are growing that the yuan could test the key 7.0 level in the coming weeks, pressured by continued global dollar strength and accommodative monetary policy from the PBOC. And while analysts don’t see decisive PBOC moves to shore up the Chinese currency, they believe that there have been signs which they interpret as efforts to slow the yuan’s fall.

The PBOC sold a combined CNY25 billion of three-month and one-year yuan-denominated central bank bills in Hong Kong on Monday as CNH broke above 6.85 against the dollar following the Loan Prime Rate cut.

Such bill issuance is a tool to stabilize foreign exchange markets by adjusting yuan liquidity in the offshore interbank market. The central bank has issued CNY85 billion PBOC bills in Hong Kong so far this year as CNH has declined.

Analysts believe the PBOC has plenty of tools to curb any “irrational and excessive volatility ” of the yuan, including reducing the FX reserve ratio for banks, guidance through daily yuan fixings or jawboning by officials.

MOVING APART

A growing divergence between U.S. and China’s monetary policy and the latter’s disappointing economic data suggest the yuan has further to fall, analysts at China Construction Bank say.

The pace of decline has accelerated since a break of the key technical level at 6.80, they note, though they doubt a repeat of the sharp sell-off seen in early Q2. Back then, the yuan dropped from 6.33 to 6.81, a 7.5% decline, as large parts of China were locked down through a fresh Covid-19 outbreak.

The yuan has dropped 2000 pips in the past two weeks to 6.86 against dollar, ending a three-month period of calm trading around the 6.70 level. The speed of the latest decline picked up on August 15, when the PBOC surprised with a cut to a key policy rate.

Both onshore and offshore yuan have continued to depreciate this week as China’s key lending reference rates were cut on Monday, dropping to the weakest point in a year and approaching 6.90 as the dollar index touched a 20-year high at 109.

On Wednesday, the yuan traded offshore, or CNH, rose above the onshore (CNY) yuan. According to market contacts, USD/CNH typically trades above USD/CNY when China’s currency is viewed as weakening.

Analysts at China Merchants Securities worry depreciation pressure will build if the PBOC moves into a more extensive cycle of rate cuts, a hawkish Fed continues to buoy the dollar, and the energy crisis in Europe weighs on euro.

KEY 7.0 LEVEL

Still seen as a key psychological level for policymakers, the PBOC allowed 7.0 to be breached in August 2019 as Sino-US trade friction escalated. One FX trader said the yuan could trade through 7.0 as the dollar strengthens, noting the PBOC may tolerate the move as the currency is still strong against the euro, the yen and the Korean won.

However, any break below 7.0 is only expected to be temporary. Li Liuyang, an analyst at China International Capital Corporation, says with a modest improvement in the Covid outlook and a stimulus package to address the slowing economy and weakness overseas, the conditions are not in place for a sharp yuan sell-off. A continued trade surplus, even as exports slow, would continue to boost the current account and aid the yuan, he said.

The central bank set the yuan fixing at 6.8536 Thursday, down 148 pips from Wednesday. Early European action Thursday saw both pairs EDGE lower, with USD/CNY at 6.8505 and USD/CNH at 6.8575.