(March 3): The yuan rallied after the People’s Bank of China signalled its comfort with the currency’s appreciation via its daily reference rate, ahead of the National People’s Congress.
The onshore unit advanced as much as 0.5% to 6.8750 per dollar, to post its biggest jump since May 12. That’s after the central bank strengthened the daily reference rate for the currency by the most since August.
The PBOC’s move came just a day ahead of the most important annual political event in the country, during which policymakers tend to anchor market confidence. The stronger fixing also signals that the PBOC is still comfortable with mild currency appreciation after it scrapped an extra fee for betting against it in the derivatives market on Friday (Feb 27).
“It is possible that they like to have a sense of anchor ahead of important events and this is not out of the ordinary indeed,” said Fiona Lim, a senior foreign-exchange analyst at Malayan Banking Bhd.
“The fix certainly seems to be a signal to keep the yuan stable and markets have definitely heeded that warning. May see some sideway actions within the 6.83-6.94 range.”
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China’s central bank set the yuan fixing at 6.9088 per dollar on Tuesday. The so-called fixing limits the yuan’s move by 2% on either side. The offshore yuan rose as much as 0.4% to 6.8751 per dollar.
The yuan’s gains come after two straight sessions of losses following the PBOC’s move on Friday to slow the currency’s advance as well as risk-off sentiment spurred by tensions in the Middle East.
The PBOC’s decision to set a much stronger fix was a surprise, especially after it removed the reserve requirement of 20% on foreign-currency forward contracts on Friday, said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group in Singapore. “It suggests that the authorities are still comfortable with a stronger yuan.”
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“We are likely to be in a 6.85-6.90 range near-term while the Middle East situation is playing out and as the authorities seek to keep the yuan stable during the two sessions,” Goh said. He expects the currency to strengthen to 6.75 per dollar by year-end.
His comments highlight the balancing act officials face as they weigh currency stability against competitiveness.
The central bank has repeatedly warned against overshooting of the exchange rate as it would pressure local exporters and worsen deflation. It pledged on Friday that going forward it will keep the yuan exchange rate stable at reasonable and equilibrium levels.
The underlying support for the currency remains firm. The yuan is supported by foreign-exchange conversion, broad weakness in the greenback and the PBOC’s tolerance for the currency’s strength.
The onshore yuan rose versus the dollar in the last seven months, its longest streak of gains since 2021. The yuan has also advanced this year against a basket of its trading partners’ currencies amid Chinese President Xi Jinping’s pledge to build a powerful yuan.
Uploaded by Arion Yeow
