(Bloomberg) -- China's central bank set its daily currency reference rate marginally stronger than 7 a dollar, leaving analysts anticipating Thursday's fixing as a key policy signal.
The Wednesday level of 6.9996 gives the People's Bank of China little headroom if it wants to track the spot rate lower while staying on the strong side of 7. The currency has recently breached that key psychological level, stoking criticism from Donald Trump and roiling global markets, but the fixing hasn't. The yuan was down 0.28% at 7.0449 a dollar at 5:03 p.m. in Shanghai.
“Investors may be concerned that the fixing may break 7 in the future, which will be seen as a sign that room for depreciation remains large,” said Tommy Xie, an economist at Oversea-Chinese Banking Corp. “The fixing in the coming days will send very important signals on the central bank's stance.”
The PBOC is seeking a balance between allowing more flexibility in the yuan amid an escalation of the trade war, and preventing a vicious cycle of depreciation and capital flight. Officials vowed Tuesday to keep the exchange rate steady, helping the currency rebound from its weakest level since 2008.
The PBOC has helped create the perception that levels matter in the fixing and the spot rate. Monday's plunge came after the central bank set the reference rate weaker than 6.9 per dollar for the first time since December. When the spot rate approached 7 in the past, officials were seen to take extreme steps to prevent further depreciation.
JPMorgan Cuts China Yuan Forecast After Manipulator Designation
It's not just the dollar the yuan has fallen against. The Bloomberg replica of the CFETS RMB Index, which tracks the Chinese currency against 24 exchange rates, is approaching the lowest level since the basket was created in 2015.
JPMorgan Chase & Co. joined investment banks to cut the forecasts on the yuan, expecting the currency to slide to 7.35 by year-end against the dollar and the trade-weighted index to fall to 88.7 by the end of 2019. The yuan could sink to as low as 7.7, if the U.S. increases tariffs on Chinese goods or takes other measures against the nation, Societe Generale SA analysts led by Jason Daw write in note.
To contact the reporter on this story: Tian Chen in Hong Kong at tchen259@bloomberg.net
To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, Richard Frost, Will Davies
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