China bolsters Yuan Support amidst record fixing gap

The People's Bank of China (PBOC) has set a daily reference rate for the yuan at 7.0968 per dollar, a move indicating the country's efforts to support its currency while the dollar gains strength.

According to Bloomberg, this rate was set within the recent trading range, after the offshore yuan experienced its most a major weakening in three weeks.

The fixing, set by the PBOC at 9:15 a.m. local time, determines the range within which the yuan can trade, a range limited to 2 per cent.

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The gap between the set fixing and the market's expectations reached 1597 pips, marking the widest disparity recorded since Bloomberg began its daily survey in 2018.

“The strong fix simply underscores policymakers’ desire and will to pursue RMB stability,” Bloomberg quoted Christopher Wong, an FX strategist at Oversea-Chinese Banking Corp, as saying.

He further added, “Clearly the fix is outside of consensus estimates, but the strong fix shows that policymakers want to send a strong message to markets.”

The daily reference rate has been under scrutiny by China watchers, aiming to discern Beijing's intentions regarding the yuan's direction.

This scrutiny comes as the yuan wobbled close to the lower boundary of its trading range.

Despite the possible benefits a weaker currency could offer to the country's exporters, officials remain vigilant against yuan pressures that could adversely affect local stocks and bonds.

On Wednesday, the offshore yuan concluded trading at a two-week low, influenced by a surge in US inflation that bolstered the dollar and Treasury yields.

According to derivative markets, there are indications that the Federal Reserve might reduce interest rates only twice this year, with the first cut expected in September.

Following the fixing, the offshore yuan saw a modest rise of 0.1 per cent.

The PBOC's emphasis on yuan stability is rooted in the belief that abrupt drops in the yuan could trigger a vicious cycle of capital outflows and further currency devaluation.

As the yuan serves as a stabilising force in the global foreign exchange market and acts as an anchor for regional currencies, heightened yuan volatility could potentially affect other currencies, including the dollar.

(With inputs from Bloomberg)