China Moves to Slow Yuan Gains After Rally to Highest Since 2018
(Bloomberg) -- China's central bank set a weaker-than-expected reference rate for the yuan in a sign of its discomfort with the currency's rally.
The People's Bank of China set its daily fixing at 6.3014 per dollar, 59 pips weaker than the average in a Bloomberg survey of analysts and traders. The onshore yuan extended gains Monday to its highest since 2018.
“It suggests the PBoC doesn't want to see dollar-yuan falling below the 6.3 level,” said Qi Gao, strategist at Scotiabank, “Yuan's advance could continue in the months ahead” on the back of continued trade surplus, portfolio inflows and safe haven bids, he said.
The yuan is one of the few currencies in Asia to gain in the past week amid a global riskoff move after Russia invaded Ukraine. It's increasingly being touted as a haven due to its falling correlation to global volatility and strong demand for the nation's bonds, seen as potential alternatives to Treasuries.
“Holding a line doesn't help because it crushes the volatility,” said Alvin T. Tan, head of Asia FX strategy at Royal Bank of Canada Hong Kong branch. If the PBOC wants to stop the yuan from advancing “it needs to raise the volatility and keep it higher persistently,” he said.
The offshore yuan's one-month implied volatility fell in January to the lowest since 2017, signaling expectations of limited fluctuations in the currency. Low volatility encourages investors to buy the offshore yuan for carry, Tan said, adding that the offshore yuan may climb to 6.25 per dollar in the coming months if “the PBOC is not serious about stopping it.”
The onshore and offshore yuan were little changed around 6.31 per dollar levels at 11:06 am in Hong Kong.
The central bank had so far refrained from intervening heavily through its daily fixing this year, except for Feb. 7, when it set the reference rate 252 pips weaker than the average forecast, the furthest from analyst estimates since 2018. The fixing limits the yuan's moves by 2% on either side.
©2022 Bloomberg L.P.
With assistance from Bloomberg
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