Yuan’s Rally Draws Subtle Signal From PBOC Over Pace of Gains

(Bloomberg) -- China is signaling that the yuan’s recent appreciation is too rapid, with steps that are likely to slow -- but not reverse -- its gains after the currency soared to multi-year highs against that of trading partners.

The People’s Bank of China set the daily dollar-yuan fixing at 6.3858, compared with the average estimate of 6.3837 in a Bloomberg survey of traders and analysts. The reference rate is weakest relative to the average forecast since May 11, although estimates on Friday were in a wide range from 6.3778 to 6.3949.

The central bank is indicating it wants to rein in the yuan’s gains after an advance of almost 3% against the dollar this quarter but traders are interpreting the push back as relatively mild. Analysts from Standard Chartered Plc and HSBC Holdings Plc see the currency’s ascent continuing, albeit at a slower pace, as attractive yields and an improving Chinese economy draw inflows.

“It is clear that the authorities are trying to prevent a one-way move mentality in the market,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. “With the authorities refraining from foreign-exchange intervention, it will be left to jawboning and setting weaker fixes to rein in the yuan’s appreciation pressure.”

The yuan rose 0.2% to 6.3686 against the dollar in onshore markets, while trading 0.2% higher at 6.3625 offshore. The PBOC had set its daily reference rate in line with market consensus in the previous two trading sessions.

The fixing on Friday follows a statement the previous day where the central bank had warned against one-way bets and predictions. The foreign exchange market is in balance currently, and the rate could go either way in the future as many market elements and policies could affect it, the central bank said in the statement.

It can’t be used as a tool to spur exports or offset higher commodity costs, authorities emphasized. The central bank also urged corporates to refrain from making speculative bets on the yuan, adding that such practices will “definitely lead to failures” in the long term.

With a gauge of the dollar’s strength near a three-year low, the yuan’s appreciation may have broader implications for the global currency market. The greenback has lost momentum as gains in Treasury yields stalled, with analysts debating if the dollar will decline further.

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Market Fundamentals

“The authorities want to strip out the speculative forces in the yuan, but meanwhile it won’t alter the broader trend driven by fundamentals, market demand and supply factors,” said Becky Liu, head of China macro strategy at Standard Chartered.

“The yuan will stay strong in the near near-term, but we could also expect counter-cyclical measures to slowdown the pace of appreciation by the PBOC,” Liu said, adding that the currency could test 6.3.

The median forecast in a Bloomberg survey of analysts is for the yuan to depreciate to 6.45 by end-December.

With China’s economy rebounding from the pandemic and foreign funds piling into its equity and bond markets, the yuan has surged to the strongest level since May 2018 versus the dollar. It has risen this year against all but six of the 31 major currencies tracked by Bloomberg, and is Asia’s best performer.

“USD-RMB will be more two-way this year, as China’s cyclical advantage narrows while the rest of the world catches up, with greater availability of vaccinations and economic re-openings,” Ju Wang, senior FX strategist at HSBC in Hong Kong, wrote in a report. For now, there is still room for further gains in the yuan, she said.

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