Yuan fix pattern spurs talk of 2019-style currency strategy

Bloomberg

China’s yuan fixings have steadied over the past week, spurring speculation that the central bank wants to cap currency losses using a method last seen in the US-China trade war in 2019.
The People’s Bank of China (PBOC) set the yuan reference rate near 7.1 per dollar for a seventh session, a move that would support the currency around the 7.25 levels given a daily 2% trading band. The PBOC had held the fix around a similar level for nearly a month during the trade war, prompting traders to give up on bearish yuan bets.
“The steady fixing should help anchor yuan expectation and prevent one-way movement,” said Ken Cheung, chief Asian FX Strategist at Mizuho Bank Ltd. He sees 7.25 per dollar as a support level before China’s twice-a-decade leadership summit that’s set to kick off on Sunday.
The PBOC has so far refrained from using heavy-handed measures to prop up the yuan, which is on course for its biggest annual loss since 1994. It signalled preference for a market-driven approach to stabilise the currency in an article published. That’s even as Beijing’s adherence to its Covid Zero policy adds to growth headwinds and Federal Reserve rate hikes widen the US-China rate gap and drives outflows.
The central bank set yuan fixing at a stronger-than-expected level for 31 straight sessions, the longest streak on record since Bloomberg started the survey in 2018. The level has gradually weakened before stabilizing around 7.1 per dollar.
The onshore yuan briefly jumped nearly 1% as it came close to the fixing level just after the market opened. The currency has been posting early gains after the central bank urged lenders to “protect the authority of yuan fixing” and an organization formed by China’s biggest foreign-exchange traders was said to have asked banks to trade the currency at levels closer to the fix at the market open in an attempt to bolster the yuan.
Dollar strength could make it challenging for the PBOC to maintain the steady fixing pattern, according to Australia & New Zealand Banking Group.
The yuan is hovering around levels seen May versus a basket of 24 trading partners’ currencies, according to a Bloomberg index.
However, the onshore yuan fell 0.2% to 7.1909 per dollar at 4:54 pm local time, as it inched back toward its weakest level in 14-years against the greenback.

Should dollar strength persist, and particularly if the yen continues to weaken, then the authorities may allow the fix to weaken further so long as the trade-weighted yuan remains stable, said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group in Singapore.
The yuan is hovering around levels seen May versus a basket of 24 trading partners’ currencies, according to a Bloomberg index. However, the onshore yuan fell 0.2% to 7.1909 per dollar at 4:54 pm local time, as it inched back toward its weakest level in 14-years against the greenback.
While yuan’s move towards 7.3 per dollar is expected, it’s likely to be a managed process, according to Guan Yi Low, Head of Asia Pacific Fixed Income at M&G Investments. The options market indicates a 67% chance that the offshore yuan will weaken to 7.3 per dollar this quarter and volatility in the currency remains near the highest since 2020.
“Giving market an anchor” as PBOC did in 2019 could be an effective way to manage the yuan, said Tommy Xie, head of Greater China research at Oversea-Chinese Banking Corp. However, it may be too early to say if the 2019 strategy is being reused, Xie said, adding that authorities could still be in wait-and-watch mode as the trade-weighted yuan remains stable.