PBOC Take Measures To Stem Yuan Appreciation

The yuan proved stubbornly immune to verbal intervention by the PBOC and fixing related guidance, as a result the PBOC took additional steps to curb recent strength in the yuan. The bank announced the reserve requirement ratio would increase to 7% from 5% currently, effective from June 15. Goldman Sachs point out "This increase would help lower FX liquidity and as a result reduce potential FX inflows and appreciation pressures of the CNY, given the recent strong demand for converting FX to CNY amid the rapid CNY appreciation. Besides the actual impact on liquidity, this announcement also sends a signal of the increased discomfort from the PBOC on the rapid appreciation of the currency."

• While fundamental drivers of the recent appreciation of the yuan against the USD have not changed, ING are confident in the efficacy of the latest measures, at least in the near term: "This increase would help lower FX liquidity and as a result reduce potential FX inflows and appreciation pressures of the CNY, given the recent strong demand for converting FX to CNY amid the rapid CNY appreciation. Besides the actual impact on liquidity, this announcement also sends a signal of the increased discomfort from the PBOC on the rapid appreciation of the currency."
• The PBOC have advocated for market forces to dictate the level of the yuan, something this latest move would appear to negate. Looking more closely at communication from the PBOC though it appears that while the bank are content for the yuan to oscillate based on economic fundamentals, they are against currency speculation which is what these measures appear designed to address.
• USD/CNH last down 6 pips on the session at 6.3722 after dropping as low as 6.3525 before the measures were announced.