Offshore yuan touches 1-month high after central bank makes tweak to daily pricing
Meanwhile, Hong Kong acts to defend its currency for the fourth time this month.
Offshore yuan, traded outside the mainland, weakened Monday, giving up early morning gains when the currency jumped to its highest level in almost a month following an adjustment by the central bank in its daily fix formula.
Last Friday, China’s central bank signalled it will more proactively guide the market, as the country faces a stronger US dollar and an ongoing trade war.
The China Foreign Exchange Trade system (CFET), a unit of the People’s Bank of China, said it had reactivated a mechanism this month – known as the counter-cyclical factor – in its daily pricing of the yuan against the dollar to counter the bias toward a weaker yuan.
The PBOC raised the yuan reference rate on Monday by 0.29 per cent to 6.8508 per dollar, halting two days of weakening.
Meanwhile, Hong Kong’s de facto central bank on Monday stepped in the currency market to defend the city’s currency, buying HK$3.93 billion while selling US$500 million in Monday’s early evening trade. The move reflected continuing capital outflow pressure from the city. The Hong Kong Monetary Authority’s intervention, the fourth time this month, will result in a withdrawal of banking liquidity and reduces the city’s aggregate balance to HK$87 billion.
Offshore yuan strengthened on Monday to its highest level since July 31 -- at 6.7817 per dollar-- but then weakened by 0.07 to 6.8106 per dollar.
Onshore yuan slipped 0.16 per cent to 6.8214 per dollar, after posting its biggest increase since February 2016 on Friday.
“The yuan counter-cyclical factor suggests that the authorities will be more proactive in signalling their CNY guidance to the market,” said MK Tang, China economist at Goldman Sachs. “They would like the market to pay more attention to such guidance, and might take more concrete actions to burnish the guidance as needed.”
China sets a daily “fix” each day, and traders and investors are allowed to trade up to 2 per cent on either side. The formula is based on the previous day’s yuan closing price and the US dollar moves against an international basket of currencies overnight.
It resumed adding in the counter-cyclical factor this month to the formula. The mechanism was introduced in May 2017, though never officially explained. It aims to lessening the affect of market forces on the price setting of the reference rate amid strong depreciation pressure in the currency and capital outflows.
In January, when the yuan had been rallying, the market makers were told to reduce the contribution of the counter-cyclical factor to zero, essentially suspending it.
Larry Hu, an economist at Macquarie Capital, said that the relaunch of the factor this time around was a clear signal from the PBOC that it will defend the yuan from weakening to 7.0 to the dollar, a psychologically important level, at least in the next couple of months.
President Donald Trump has accused China of weakening its currency make up for US-imposed tariffs -- a charge China denies.
The yuan has fallen 4.6 per cent against the greenback this year amid the US-Sino trade war and concerns of tighter monetary policy by the US Federal Reserve.
The Trump administration is planning to impose tariffs on an additional US$200 billion of Chinese imports as early next month.
“The stabilisation of the yuan could be related to the [trade] package deal both sides are negotiating on,” Hu said.