May 22, 2024

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China is beginning to slow the yuan’s one-way slide

China is beginning to slow the yuan’s one-way slide
  • State banks sell dollars for yuan – market sources
  • PBOC repairs the inner band more vigorously than expected
  • The yuan rebounds and pulls Asian stocks and currencies along

SHANGHAI/BEIJING (Reuters) – China set a stronger-than-expected trading range for its currency on Tuesday and state banks sold dollars against the yuan, market sources said, in the strongest sign yet of the authorities’ growing unease with it. Sliding acceleration.

The yuan has fallen about 4% against the dollar in two months as weak consumer confidence and a slumping real estate market exhaust the momentum generated by the post-pandemic recovery. It rebounded about 0.4% on Tuesday, its best gain in nearly two weeks.

The country’s banks were selling dollars to buy yuan in the offshore spot market, according to four people familiar with the trades, and the currency appeared to be approaching the psychologically important 7.25 level for the dollar, two of the people said.

Banks were also active late Monday, according to two other traders, when they bid the yuan sharply into the inside close, affecting the official midpoint of the yuan at the central bank the next day.

On Tuesday, the People’s Bank of China (PBOC) set the mid-range even flatter than expected, departing from forecast models by the most since May.

Taken together, analysts said the moves showed official unease with the yuan’s bearish momentum and that it could slow but possibly not halt the decline, given the dire economic outlook.

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“They are sending more signals now that they are uncomfortable…they want to slow down the yuan’s weakness,” said Moh Seong Sim, currency analyst at Bank of Singapore. “The speed was just too much for them to satisfy.”

On Monday, the yuan closed at a seven-month low of 7.2425 per dollar and reached 7.2105 in Tuesday afternoon trading.

“7.25 remains a key threshold,” said one market source, adding that a break through the level could quickly send the yuan to lows last seen in 2022.

All sources spoke on condition of anonymity because they are not authorized to speak about the trades publicly. UBS said in a note that its trading desk saw significant interest among banks in pre-market trades to buy dollars through currency swaps, and said there may have been efforts by authorities to neutralize the impact of their immediate intervention.

A country’s banks usually act on behalf of a country’s central bank in the foreign exchange market, but they can also trade for themselves or their clients.

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The push comes as investors are feeling the pinch on China, as data shows China’s vaunted recovery has faltered. However, a choppy recovery has stoked stimulus expectations to help offset growth concerns.

Hong Kong stocks (.HSI) and the Australian dollar rebounded sharply on Tuesday in concert with the yuan.

Analysts said moves to halt the yuan’s decline were not as strong as they were last year, when regulators took measures to encourage capital inflows, but they could be enough to slow the selling.

In November, the currency hit a 14-year low of 7.3280 per dollar, while the offshore yuan touched a record low of 7.3746.

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“The implication is that markets are going to be much more cautious about pushing the dollar/offshore yuan much higher from here,” said Alvin Tan, head of Asia currency strategy at RBC Capital Markets.

That could at least rein in the Chinese economy – or potentially further rate cuts – preventing the yuan from declining further.

“We should consider the possibility of further easing in the future,” said Rob Carnell, ING’s regional head of research for Asia and the Pacific.

“What we’ve seen is just the first iteration of rate cuts that we’re going to get,” Carnell said. “We’re going to get a lot of them over the next couple of months.”

“This should keep the yuan on the back foot.”

Additional reporting by The Newsroom in Shanghai and Beijing, Ankur Banerjee, Tom Westbrook and Ray Wei in Singapore; Editing by Vidya Ranganathan, Kim Coghill, and Jacqueline Wong

Our standards: Thomson Reuters Trust Principles.