CHINA ramped up support for the currency via its daily reference rate after US Federal Reserve’s caution over future interest rate cuts boosted the US dollar and sent the offshore yuan to a fresh one-year low.
The People’s Bank of China (PBOC) set the so-called fixing 1,232 pips stronger than the average estimate in a Bloomberg survey on Thursday (Dec 19). The gap between the fixing and the estimate was the widest since July.
The move is a sign authorities are boosting their support for the yuan in the face of growing expectations that China will tolerate a weaker currency to mitigate the impact of US tariffs on the nation’s exports. PBOC monetary department head Zou Lan said on Friday that FX policy will aim to “vigorously counter external impacts”.
“The fixing gap widening mirrored the mounting FX depreciation pressure due to US dollar strength and PBOC’s escalating efforts to defend the currency,” said Ken Cheung, chief Asia FX strategist at Mizuho Bank. “As the PBOC shows its strong commitment to limit yuan depreciation this year, the relatively steady onshore yuan is expected to pull the offshore yuan back to near 7.3 level by year-end.”
The central bank had been supporting the yuan with stronger-than-expected fixings since Donald Trump won the US election, setting a soft red line around 7.2. The daily rate, which limits moves in the onshore yuan by 2 per cent on either side, is the PBOC’s most frequently used tool to manage the currency.
The world’s second-largest economy is challenged by a prolonged property crisis and souring consumer sentiment. To rejuvenate growth, top officials last week signalled bolder economic support next year, embracing a “moderately loose” monetary policy and pledging a “more proactive” fiscal policy.
Expectations the PBOC will cut interest rates is also dragging down Chinese bond yields, which is exacerbating the nation’s yield gap with the US and the yuan’s losses.
BNP Paribas, UBS and Societe Generale all predict the onshore yuan will weaken beyond last year’s record low of 7.3510 some time in 2025.
The offshore yuan rose 0.2 per cent to 7.3134 per US dollar after the PBOC’s fixing. BLOOMBERG
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