Market Turns Bullish as Central Bank Steps in to Defend Yuan

The Chinese central bank has boosted yuan fixing to the highest level.

Market Turns Bullish as Central Bank Steps in to Defend Yuan

By: Faraz Haleem Published:

The Chinese central bank has boosted yuan fixing to the highest level

The Chinese renminbi is inching toward stability, while the central bank continues to defend yuan ahead of its inclusion in IMF's basket of currencies in October.

The People’s Bank of China, on Wednesday, strengthened the daily reference rate — the most since June 23 to 6.6195 a dollar, reflecting an incline of 0.39%. However, in Shanghai forex market, yuan slipped to 6.6298 per dollar in the early trading hours, following the raise. In offshore markets, yuan saw downward pressure and was trading at 6.6353 against the dollar, up 0.04%, as of 1:31 AM EDT.

Over the past few weeks, the Chinese central bank has boosted yuan fixing, breaking its weakness bias. Market bears have also reversed their bets against yuan, owing to the raise in midpoint rate. Speculation is that China will keep yuan stable in the near term and any devaluation, if it ever takes place, would be gradual.

The external economic factors are also in favor of the government’s plan to make the currency stable. A falling dollar has been helping authority keep yuan appreciated in the currency market. Analysts have reason to believe that weakness in the US economy would eventually weigh on greenback that could end up being a supportive factor for China.

Currency experts, however, believe that the volatility in yuan will continue to prevail owing to shattered investor confidence. Rising slowdown pressure in the Chinese economy has added to growth concerns among investors, who seemed hesitant to take any risks.

Beijing has also spurred on the fiscal and monetary front to underpin growth in the economy. However, despite a gloomy outlook, the central bank seems reluctant to use any monetary tools to revive growth.

Earlier today, researchers at the National Development and Reform Commission (NDRC) said reserve requirement ratio and interest rates should be lowered further, according to an official statement. They further added that it would help boost investment and reduce borrowing costs. However, they did not give any timeline and said that rates should be cut at an appropriate time. It was quite unusual, as generally, NDRC neither comments on monetary policy publicly nor has the power to set policy. This has also caused speculation in the market that the central bank may ease monetary policy in the near future.

In addition to this, China’s top planners also called for making investments more effective and implementing a proactive fiscal policy to put the economy back on track. They further added that the private sector should be encouraged to invest in the country to build a sustainable and strong economy.

In money markets, the monetary authority added $8.30 billion (55 billion yuan) into the financial system, using seven-day reverse repos. The liquidity in the market got a bit tighter today as the seven-day repurchase rate – a gauge of interbank funding availability – increased by one basis point to 2.28%. In the first three days of the week, PBOC has also mopped up liquidity about $22.9 billion (151.5 billion) from the economy, Bloomberg reported.