China Escalates Battle Against Yuan Bears With Fixing Guidance

China ramped up its efforts to stem losses in the yuan by offering the most forceful guidance since October through its daily reference rate for the managed currency.

(Bloomberg) — China ramped up its efforts to stem losses in the yuan by offering the most forceful guidance since October through its daily reference rate for the managed currency.

The People’s Bank of China set the so-called fixing for the yuan at 7.2076 per dollar on Thursday compared to an average estimate of 7.2994 in a Bloomberg survey, the largest gap since October. The attempted boost for the currency comes as broad dollar strength combined with evidence of China’s sluggish economy helped push the onshore yuan toward a 16-year low on Wednesday.

The PBOC’s move suggests it’s looking to limit yuan losses exacerbated by a surprise rate cut this week, which was aimed at supporting growth. Together with a selloff in US Treasuries, that intensified focus on the widening US-China yield gap and added more pressure to the yuan, dragging it to the bottom of emerging Asia’s currency rankings for the year.

The onshore yuan fell 0.2% to 7.3132 in mid-morning trading Thursday. It’s down almost 6% this year.

The fixing “signals the desire of the PBOC for a more gradual move and against excessive volatility in FX but the fixing can do little to stop the depreciation trend of the yuan,” said Redmond Wong, a market strategist at Saxo Capital Markets.


So far this week, the central bank has sought to stem yuan drops with stronger-than-expected daily fixings and announced an additional bill sale in Hong Kong. The latter move helped tighten yuan liquidity in the offshore market, sending a measure of the currency’s borrowing cost in Hong Kong to the highest in more than a year on Wednesday.

Policymakers were also active in other markets. 

On Thursday, the PBOC added 163 billion yuan ($22 billion) of cash on a net basis through reverse repurchase contracts, following the near 300 billion yuan pumped in Wednesday, the largest since February. And this week authorities asked some investment funds to avoid being net sellers of equities, according to people familiar with the matter. 

A key index of shares in Hong Kong, where a majority of the members are mainland firms, looked poised to enter a technical bear market Thursday.

For now, yuan bears seem to be sticking to their guns. One-month offshore dollar-yuan risk reversals, a gauge of demand for bullish call options over bearish puts for the pair, jumped to the highest since May this week.

But others are cautious about chasing the weakness given the potential for more forceful steps from China. The central bank can follow up with more measures to stem losses, such as injecting dollar liquidity to onshore markets and making it more expensive for traders to short the currency in the forwards market, according to Goldman Sachs Group Inc. 

And despite its losses versus the dollar, the yuan has been performing much better relative to trading partners’ currencies. It has strengthened about 1% over the past month versus a basket of 24 exchange rates, according to a real-time Bloomberg replica of the CFETS RMB Index. 

Here Are the Tools That China Uses to Manage the Yuan: QuickTake

“Authorities have always been against excessive yuan volatility and letting go here would create unwanted volatility,” said Eddie Cheung, senior emerging markets strategist, Credit Agricole CIB Hong Kong Branch. “I expect a very gradual climb as markets will be more sensitive to whether authorities take more action here to curb speculators.”

–With assistance from Qizi Sun and Tania Chen.

(Updates with additional context.)

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