Yuan Surger: China’s Currency Shifts Gears!

China took decisive action on Tuesday to stem the yuan's rapid depreciation, setting a stronger-than-expected trading band and selling dollars against the yuan.

The Chinese government has set a stronger-than-expected trading band for its currency, the yuan, and state banks have sold dollars against it in the offshore spot market. This is the strongest sign yet that the authorities are growing increasingly uncomfortable with the yuan’s quickening slide, which has seen it fall 4% on the dollar in two months. On Tuesday, the yuan surged by 0.4%, its best gain in two weeks, nearing the crucial 7.25 per dollar level. The Chinese government’s actions reflect their efforts to stabilize and safeguard the currency from further devaluation risks.

Yuan Breaches 7.25 Level, Raising Concerns of 2022 Lows

The PBOC has acted to slow the yuan’s decline by setting a stronger midpoint within the trading band on Tuesday. Banks actively bought the yuan before the onshore market closed, impacting the central bank’s official fixing the following day. Analysts see official concerns over the yuan’s decline but doubt it will completely stop the downward trend. Moh Siong Sim of the Bank of Singapore thinks the yuan’s decline is too fast, prompting the PBOC’s intervention.

Chinese yuan closed at 7.2425 per dollar on Monday, a seven-month low, and stood at 7.2105 on Tuesday. Sources in the market suggest that if the yuan breaches the 7.25 level, it could reach the lows of 2022. UBS saw banks eager for pre-market trades to secure dollars through currency swaps, possibly offsetting spot intervention impacts. State banks act as central banks in forex trading, but they may also trade for themselves or clients.

HK Stocks and AUD Rebound on Anticipation of Chinese Stimulus

Investors have pushed back against the Chinese yuan’s recent slide, as data shows the country’s economic rebound is faltering. HK stocks and AUD rebounded as investors anticipate Chinese stimulus measures to support growth concerns. Chinese government’s efforts to stabilize the yuan may be less forceful than last year, but could still slow selling.

Chinese yuan is in decline, hitting a 14-year low of 7.3280 per dollar and a record low of 7.3746 offshore. Markets are cautious about pushing the yuan down; interest rate cuts could prevent further decline. Alvin Tan, head of Asia FX strategy at RBC Capital Markets, and Rob Carnell, ING’s regional head of research, Asia-Pacific, both agree that further easing is likely and will keep the yuan on the back foot.

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