China Bolsters Yuan with High Daily Reference Rate

The People’s Bank of China has tackled the yuan’s weakness by setting the daily fixing of the managed currency at a high level, significantly higher than expectations and the highest since November.

The Chinese central bank set the so-called reference rate at 7.1087 yuan per dollar on Thursday, a difference of 609 points higher than the average estimate according to a Bloomberg survey. This came after the yuan had depreciated by 1% within the country since the end of last year.

Ken Cheung, chief Asian currency strategist at Mizuho Bank in Hong Kong, stated that :

“the People’s Bank is bolstering its support through the currency’s reference rate in order to shield the yuan from the increasing expectation of monetary policy easing in China. It is expected that the reliance on the reference rate instrument will continue for some time until the country’s economic recovery gains momentum”.

The Chinese yuan has been receiving continuous support from the People’s Bank of China in the form of the daily reference rate of the currency over the past seven months.

The significant gap between the US interest rate and the Chinese interest rate has resulted in a particular advantage for the dollar and reduced the prospects for the country’s currency. Beijing allows the yuan to trade within a 2% margin above or below its reference rate in the domestic market.

The yuan’s support today coincides with expectations that Beijing will loosen monetary policy next week, which threatens to worsen the weakness of the yuan.

Investors are awaiting the decision to determine whether the People’s Bank will lower interest rates on medium-term loans on Monday or inject additional liquidity into the banking system to boost the economy. China is bolstering support for the yuan following Moody’s downgrade this week.

An official from the central bank stated to state media that the country may reduce the required reserve ratio for banks in order to boost lending, according to a report from Xinhua.

Additionally, the Chinese currency is also facing pressure as local consumer price data is set to be released on Friday, which is expected to expand concerns about contraction.

The People’s Bank, at the end of last month, stated during a meeting of the Monetary Policy Committee that it would generally keep the yuan stable at reasonable levels, preventing excessive fluctuations in one direction.

The yuan’s exchange rate rose by 0.2% to 7.1718 against the dollar in external trading on Thursday, while its local rate increased by about 0.2% to 7.1611 against the US currency.

The yuan continues to weaken and test the patience of the People’s Bank of China as pressure mounts on it due to a decline in Chinese bond yields to their lowest levels in several years amid bets on interest rate cuts.

On the other hand, the minutes of the Federal Reserve’s meeting last week indicated that the United States would maintain higher interest rates for a longer period of time.

Fiona Lim, a senior currency strategist at Malayan Banking Berhad in Singapore, said:

“There are still some upward risks to the dollar-yuan exchange rate, which could reach 7.20. It seems that the People’s Bank is indicating a clear intention to ease its monetary policy, while the Federal Reserve may not be ready to do so at all.”