China’s yuan hits 28-month low despite fresh policy step, nears daily down-limit

September 26, 2022: China’s yuan touched a 28-month low against the dollar on Monday, only steps away from its downside trading limit, despite the central bank taking steps to rein in the currency’s weakness.

The People’s Bank of China (PBOC) said it would raise the foreign exchange risk reserves for financial institutions when purchasing FX through currency forwards to 20% from the current zero, starting on Sept. 28.

The announcement, along with another firmer-than-expected daily midpoint fixing, was meant to slow the pace of yuan depreciation by making it more expensive to bet against the currency, traders said.

“This could stem further forward positions that have been negative for the yuan and slow its depreciation pace,” analysts at Maybank said in a note.

Prior to market opening, the PBOC set the midpoint rate at 7.0298 per dollar, 378 pips or 0.54% weaker than the previous fix of 6.992 on Friday, the weakest since July 7, 2020.

However, the midpoint continued to come in much stronger than market projections for the 23rd straight trading session, traders and analysts said. It was 279 pips stronger than Reuters’ estimate of 7.0019.

The official daily midpoint fixing limits the onshore yuan to trade in a narrow range of 2% above or below, and Monday’s guidance kept the range to between 6.8892 and 7.1704.

The onshore yuan opened at 7.1400 per dollar and weakened to a low of 7.1690 at one point, the softest level since May 27, 2020 - mirroring broad falls in other currencies amid a sweeping rally by the dollar thanks in part to the US Federal Reserve’s rapid tightening of monetary policy.

It was changing hands at 7.1662 at midday, 364 pips weaker than the previous late session close. And the midday level was 42 pips away from the lower end of the trading band.

“The market is almost hitting the limit,” said a trader at a foreign bank.

Still, market participants believe more policy actions would be rolled out should the yuan’s weakness persists.

“Given the weak CNY level, it is likely that PBOC would roll out measures to remove market’s one-side depreciation of CNY against the US dollar in the near term,” said Li Lin, head of global markets research for Asia at MUFG Bank.

Li expects further cuts to the amount of foreign exchange banks must hold as reserve, after a reduction earlier this month.

By midday, the global dollar index hovered around its two-decade high of 113.996 at midday, while the offshore yuan was trading at 7.1704 per dollar.

Reuters