Yuan’s Gains May Be Capped After PBOC Cuts Shorting Costs

Previous rule changes saw yuan dip an average 0.5% in 24 hours. Traders to watch fixing and extent of official intervention.

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The yuan came under pressure in early Monday trade, dragging regional counterparts lower with it, after authorities made it easier to bet against the currency’s gains.

The offshore rate dropped as much as 0.7% against the greenback after the People’s Bank of China said financial institutions will no longer need to set aside cash when purchasing foreign exchange for clients through currency forwards, effective Monday. The Australian dollar, a rough proxy for yuan traders that offers better liquidity, declined as much as 0.4%.

The PBOC’s measure comes in the wake of Friday’s 1.4% surge in the yuan, its biggest advance in more than 13 years, and makes the central bank’s daily currency fixing a key focus when markets open.

This “may be an attempt to moderate the yuan’s increase,” Marc Chandler, chief market strategist at Bannockburn Global in New York, wrote in a report Sunday. “When the PBOC last did this, in September 2017, the yuan fell around 2.5% in the following few weeks.”

A similar move now would bring the onshore yuan toward 6.8650 per dollar, Chandler said. The currency retreated to 6.7320 per dollar, after closing on Friday at the strongest level since April 2019.

The central bank’s latest move comes against the backdrop of a slide in the dollar that’s been fueled by unprecedented U.S. stimulus efforts to counter the fallout from the Covid-19 pandemic. The yuan has just had its best quarter in 12 years versus the U.S. currency, appreciating more than 4%.

Banks previously had to hold 20% of sales on some foreign-exchange forward contracts, a rule imposed two years ago when the currency slumped toward 7 per dollar.

As well as the result of the fixing, the yuan’s move on Monday will also depend on the extent of official intervention to amplify the apparent message from authorities to calm the yuan’s strength.

On the three previous occasions when the rule was changed, it was accompanied by a miss or a change in the fixing rate, although this varied from 0.1% to 0.5%, according to a Bloomberg study. The onshore yuan moved by an average of 0.5% within 24 hours of the rule change and was roughly sustained a week after the rule change.

– Bloomberg

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