03 June, 2017
The yuan spot rate has surged around 0.7 per cent since last Friday to a near seven-month high against the U.S. dollar, strengthening views the central bank was setting the Chinese currency on a firmer path.
Against that backdrop, the yuan has appreciated even after Moody's Investors Service last week downgraded China's credit rating and said it expects the economy's financial strength to erode in coming years.
"The Moody's downgrade and a weaker spot rate compared to the fixing could have spurred the authorities to change the fixing mechanism and potentially intervene in the market", said Jason Daw, Singapore-based head of emerging-market currency strategy at Societe Generale SA.
The yuan ended at 6.8162 per dollar on Friday, up 0.5 percent over the week, a rare spurt for a currency that usually trades in a wafer-thin range. Also, with a twice-a-decade leadership re-shuffle in the Communist Party due later this year, China's tolerance for market volatility is low, he said - the state is moving to "put a floor" under markets.
The yuan appreciated to a seven-month high Thursday, showing that China's desperate measures to prop up its currency are working.
The yuan does not face much near-term pressure to depreciate, at a time when the dollar has not shown much momentum, despite the Fed signaling that an interest rate hike may come soon in its minutes released in May.
Before the market open, the PBOC fixed the official guidance at 6.809 per dollar, up from 6.8633 previously.
The People's Bank of China didn't immediately respond to faxed questions about the yuan on Wednesday.
This one's for the FX nerds and has gained a lot of traction with currency strategists.
While lessening the impact of the currency's daily close on the next day's fixing, the moves "may also reflect the policy intention to have the RMB trade with greater two-way volatility, which is easier to introduce during a soft United States dollars environment", HSBC foreign exchange strategists wrote in a note Friday.
"It sounds to me that the PBOC prefers having more influence over the yuan's exchange rate at this stage", he said. But amid a broad weakening in the dollar in recent months, the Chinese currency has stayed largely stable against the greenback - until last week.
China took a major step past year by opening up its $9.3 trillion bond market to foreign investors through the China Interbank Bond Market direct access scheme, scrapping investment quotas and widening access for commercial banks, insurance companies, securities firms and asset managers from the initial base of foreign central banks and sovereign wealth funds. "Unlike the previous rallies in the yuan, this time, the one-way expectation of yuan depreciation has changed", a Shanghai-based trader at a Chinese bank said.
Thailand's central bank said it will hold a news conference on foreign exchange regulation reforms on Monday, as policy makers remain focussed on tamping down a strong baht.
The overnight Hong Kong Interbank Offer Rate for the yuan jumped for the second day in a row Thursday to reach 42.8%, the highest since January.
Dim Sum bond issuance dropped to a dismal 527 million yuan (US$77.4 million) in May 2017 from 9.37 billion yuan in May 2016, and 14.15 billion yuan the May before, according to Thomson Reuters data. Beijing also is countering U.S. President Donald Trump's claims that the yuan is undervalued.
China's yuan pulled back from near seven-month highs against the U.S. dollar on Friday, after liquidity tightness eased slightly in Hong Kong and the greenback gained in global markets.
