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The People’s Bank of China set a surprisingly high trading range for the yuan against the dollar, stepping up efforts to defend against shorting the currency as the currency fell to lows not seen since the 2007-08 financial crisis.
Currency strategists and economists said the move reflected growing dissatisfaction with a weaker yuan among senior officials, who welcomed an export boost from a weaker currency but remained wary of capital outflows that could spark a sharp depreciation from a stronger dollar.
Despite the move by the People’s Bank of China, the yuan was down 0.2 percent at 7.3417 per dollar in early trade on Friday, and has lost about 6 percent this year to a 16-year low.
The monetary easing to boost the economy has depressed interest rates on Chinese government bonds relative to U.S. Treasuries and has driven more than $20 billion of foreign capital out of China’s onshore debt market this year. This adds to downward pressure on the exchange rate.
“It’s a very dynamic dance,” said Hui Shan, chief China economist at Goldman Sachs. She said the central bank’s main goal is to rein in currency depreciation as weak growth means it can’t raise interest rates to match those in the U.S. . “Most investors still expect (the yuan) to continue to depreciate.”
The People’s Bank of China’s recent efforts to prop up the yuan have focused on daily determination of the midpoint of the currency’s trading range, or 2 percent in two-way trading against the dollar. On Friday, the People’s Bank of China set the midpoint rate at 7.215 yuan per dollar, about 0.11 yuan higher than the consensus forecast of analysts polled by Bloomberg.
The stronger-than-expected report on Thursday showed exports contracted for a fourth straight month and pushed the yuan to its lowest point last October, when cities across the country were forced into lockdown to contain the Covid-19 outbreak. the fixing price.
“You can see why the yuan is falling to new lows because the dollar is stronger across the board and the options for the PBOC (to support the yuan) remain limited,” said Mansoor Mohi-uddin, chief economist at Bank of Singapore.
“The central bank will continue to try to use this solution to prevent the exchange rate from falling further, which will worsen sentiment towards China, leading to more capital outflows and further falls,” he added. “They don’t want to be caught in this vicious cycle.”
But the PBOC remains under pressure to ramp up stimulus and boost growth. The next major economic data is due on Saturday, the official consumer price index for August, which economists polled by Reuters forecast to rise just 0.2 percent from a year ago.
Currency strategists say the chances of a turnaround in the yuan are slim unless Beijing unleashes major fiscal stimulus or the dollar’s gains start to fade.
“Now that we’re past last year’s lows, it seems like there’s more to come, and the key is that people outside of China think that Chinese investors are looking to get out,” said Sean Callow, senior currency strategist. express. Westpac Banking Corporation.
The bank is “now recommending shorting (against the yuan) and while much of that is due to a stronger dollar, there is actually little evidence that sentiment on the yuan has changed,” he said.
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