China acts to slow yuan’s climb as inflows lift currency
The PBoC set a softer daily midpoint at 6.8198 per dollar and several banks raised dollar deposit rates to slow the yuan, which traded at 6.7837 and is 3.1% stronger year-to-date.
China’s central bank set the daily midpoint for the yuan at 6.8198 per dollar on June 8, a fixing 248 pips weaker than market consensus. The currency traded at 6.7837 on the same day and is 3.1% stronger against the dollar year-to-date.
The People’s Bank of China uses the daily midpoint as a reference around which the yuan may move roughly 2% in either direction. A softer midpoint makes it harder for the currency to strengthen quickly. Several domestic banks have raised rates on dollar deposits, encouraging savers to keep funds in dollars rather than convert them into yuan.
A stronger yuan reduces the yuan value of foreign-currency earnings for exporters that convert dollars into yuan at home, which can squeeze margins in manufacturing and trade sectors.
China International Capital Corporation wrote that yuan moves are “broadly tracking the dollar index but with notably lower volatility.” Analysts at Huatai Futures added that the currency’s resilience “suggests that the drivers of the exchange rate have shifted beyond the interest-rate gap, increasingly reflecting stronger FX settlement flows and improved sentiment toward yuan-denominated assets.”
The yuan has strengthened even while the US dollar has firmed on expectations of further US interest-rate rises. Market participants attribute the divergence largely to foreign investment into Chinese assets and steady foreign-exchange settlement flows that support the currency.
Political and commodity developments have added complexity to the outlook. Oil prices rose more than $2 per barrel after renewed strikes in the eastern Mediterranean reduced hopes for reopening the Strait of Hormuz. Higher energy costs can affect trade balances and capital flows.
China is due to release trade and inflation figures this week and the United States will publish consumer price data midweek. Traders will watch those releases for signals on capital flows and monetary policy expectations, which could affect exchange-rate moves for the rest of June.
The PBoC is managing the task of restraining rapid appreciation while capital and settlement activity support the yuan. How the currency performs through the coming data week will be a key factor for markets.
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