China’s yuan steady after central bank signals its support

Bloomberg

China’s yuan was stable in the onshore market following Friday’s surge, after the central bank signalled that it’s taking action to support the currency through its daily fixing.
Starting this month, banks resumed using an adjustment in the daily pricing of the currency against the dollar, known as the counter-cyclical factor, to mitigate the bias towards a weaker yuan, the People’s Bank of China said. The fixing has been consistently stronger than expected recently, according to Bloomberg surveys. China had suspended use of the factor in January.
The announcement adds to signs that China is pushing back against yuan declines, with the central bank this month boosting the cost to short the currency and urging lenders to prevent any “herd behavior” in the foreign-exchange market.
The yuan’s drop of about 6 percent against the dollar over the past three months, more than any other Asian currency, raises the risk that the capital outflows seen in 2015-2016 will reappear.
“The move could end the one-way depreciation of the yuan and stabilise the currency in the near term, as the central bank clearly signaled its intention to keep the yuan stronger than the key psychological
7 per dollar level,” said Ken Cheung, Hong Kong-based senior Asian currency strategist at Mizuho Bank Ltd.
By explicitly acknowledging the reactivation of the counter-cyclical factor, Chinese authorities are likely to “be more proactive in signalling their yuan guidance”, Goldman Sachs economists led by MK Tang wrote in a note. “If the guidance were not heeded by the market, there might be follow-up policy actions to imprint the guidance on the market.”
The PBOC said that the factor “plays a positive role in keeping the yuan rate at a reasonable equilibrium level.”