China’s yuan is anything but stable as Communist Party congress approaches

Bloomberg

China’s currency has swung from hot to cold in a matter of weeks, thwarting expectations that policy makers would keep the yuan stable before a crucial Communist Party congress next month.
The yuan slumped 0.5% to 6.6210 per greenback as of 5.30pm in Shanghai, taking its decline from an 8 September peak to 2.8%. That’s a sharp reversal from earlier this month, when the currency surged 1.5% in just six days. The stunning shift has propelled a gauge of 50-day price swings on the yuan to a six-month high.
With China’s financial markets closed for the whole of next week due to National Day holidays, there are effectively just over two weeks of trading to go before the congress begins on 18 October.
The turning point for the currency came when the People’s Bank of China (PBOC) eased a forwards trading rule that made betting against the currency more expensive—a clear signal that the surge had gone far enough.
A mild recovery in the greenback thanks to a more hawkish Federal Reserve—the Bloomberg Dollar Spot Index is up 1.3% since 8 September—has hastened the yuan’s decline.
“Investors were too optimistic earlier, and they are now pushing the yuan lower because they figured the policy makers believed the currency was too strong,” said Eddie Cheung, a strategist at Standard Chartered Plc in Hong Kong. “There’s still room for the dollar to rise in the short term if the market becomes more confident on US rate hikes. That said, the yuan could weaken further this year, though the PBOC wouldn’t allow any sharp declines.”
In a sign of bearishness, the exchange rate’s official close—a level considered by the PBOC when setting the next day’s reference rate—was 0.4% weaker than the fixing on Monday.