Chinese Yuan Ends 28-Month Low Despite New Policy Measure, Approaches Daily Lower Bound

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SHANGHAI — The Chinese yuan ended Monday’s domestic trading session at a fresh 28-month low against the dollar, near its downside trading limit, despite central bank moves to rein in the currency’s weakness. .

The People’s Bank of China (PBOC) said it will increase foreign exchange risk reserves for financial institutions when buying currencies through currency futures to 20% from zero from the September 28.

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The announcement, along with another firmer-than-expected daily midpoint fixation, was aimed at slowing the pace of the yuan’s depreciation by making it more expensive to bet against it, traders said.

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“This could stem new futures positions that have been negative for the yuan and slow its pace of depreciation,” Maybank analysts said in a note.

Ahead of the market open, the PBOC pegged the midpoint rate at 7.0298 to the dollar, 378 pips or 0.54% lower than the previous patch of 6.992 on Friday, the weakest since July 7, 2020.

However, the midpoint continued to be much stronger than market projections for the 23rd straight trading session, traders and analysts said.

The official daily median fixation limits the onshore yuan to trade in a tight range of 2% above or below, and Monday’s guidance held the range between 6.8892 and 7.1704.

The onshore yuan ended the domestic session at 7.1464 to the dollar, its weakest close since May 28, 2020 – reflecting wide falls in other currencies amid a rapid recovery in the dollar thanks in part to the tightening rapid monetary policy of the US Federal Reserve.

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The onshore yuan hit an intraday low of 7.1690, 14 pips from the lower end of the trading band.

« The market is almost at the limit, » said a trader at a foreign bank.

A second trader at a foreign bank said dollar purchases were significant as many corporate clients rushed to grab the last chance to secure their dollar futures buying contacts before the reserve ratio rose. of risk comes into force on Wednesday.

Still, market participants believe more policy measures will be rolled out if yuan weakness persists.

« Given the low level of CNY, it is likely that the PBOC will roll out measures to suppress the one-sided market depreciation of CNY against the US dollar in the near term, » said Li Lin, head of global markets research. for Asia at MUFG. Bank.

Li expects further reductions in the amount of currency banks must hold in reserve, following a reduction earlier this month. (Reporting by Winni Zhou and Brenda Goh; editing by Jason Neely)