MNI: PBOC Underpinning Yuan, But US Tariffs Key - Advisors
MNI (BEIJING) - The People’s Bank of China is signalling its intent to keep the yuan exchange rate stable to the dollar for now, but any worsening in trade tensions with the U.S. over the rest of the year would be likely to prompt a steady but gradual depreciation of the currency, policy advisors and traders told MNI.
The PBOC kept its daily onshore CNY central parity price stronger than 7.20 to the dollar on Monday after USDNCY breached the level of 7.30 on Jan 3, showing its determination to prevent any significant depreciation for the moment, said an advisor familiar with monetary policy.
The yuan is only allowed to trade in a 2% band around the midpoint rate. The PBOC will continue to discourage any one-way bets developing on a weaker yuan even as the “Trump trade” drives the dollar index closer to 110, the advisor said.
While the onshore yuan has weakened to 7.33 since New Year, the PBOC has headed off more significant depreciation by employing its so-called “counter-cyclical factor” when setting its daily fixings, which have remained in a narrow band from 7.1843 to 7.1996 since mid-November. The gap between the official fixing and market mid-point rate estimates expanded to 1318pips on Tuesday.
In addition to its continuing use of the counter-cyclical factor, the PBOC has various other tools for influencing currency markets, including changes to forex reserve requirements and issuance of yuan-denominated PBOC bills in offshore markets, together with capital controls, the advisor noted. (See:MNI: PBOC Restarts Counter-Cyclical Factor In Yuan Fix-Traders)
CHANGE IN POSTURE
The PBOC publicly pledged to ensure yuan stability after the offshore USDCNH rate breached 7.30 towards the end of last year, with USDNCY following it through that level on Jan 3. In the Q4 meeting of its monetary policy committee, the PBOC stressed it would “resolutely" mitigate the risk of the yuan exchange rate overshooting, and deleted a reference made at its Q3 meeting to "enhancing yuan exchange rate flexibility.”
The PBOC’s posture has meant that the yuan has risen against other currencies which have depreciated more quickly against the dollar, tending to make Chinese exports less competitive, another policy advisor said. Should the dollar continue its broad-based rally, then China’s central bank should allow market forces to play their role, and permit some depreciation against the greenback, he said, though he added that the yuan would still tend to strengthen against other currencies.
The CFETS RMB Exchange Rate Index rose from 98.36 at the end of September to 102.09 as of Jan 3, while the dollar index jumped from 100.8 to 108.9. During this period, the yuan appreciated by 4.4% against the euro, 6% against the yen, and 3.8% against the pound.
A forex trader based in Hong Kong told MNI that while the exchange rate is likely to fluctuate around 7.30 in January, if U.S. President-elect Donald Trump announces phased tariff increases on China of 40% or higher, then the yuan would enter a period of depreciation, though it is unlikely to be fast and with weakness capped at a new range limit of around 7.5 to the dollar.
The PBOC will further guide state banks to strengthen foreign exchange swap operations and add dollar liquidity in the offshore market, while tightening CNH liquidity, the trader said.