SHANGHAI – China’s yuan inched to a near 32-month high against the U.S. dollar on Friday, after the central bank lifted its official guidance rate to the stronger side of the psychologically important 7-per-dollar mark for the first time since 2023.
Market participants have been closely monitoring the guidance, viewing adjustment as potentially signalling a shift in the authorities’ stance on foreign exchange.
Traders have been watching to see whether the central bank would allow the official midpoint to strengthen beyond 7 following spot rate movement late last year, in what they said could represent official tolerance for yuan appreciation.
Prior to market open, the People’s Bank of China (PBOC) set the midpoint at 6.9929 a dollar, the strongest since May 17, 2023, and 90 pips firmer than the previous setting.
The bank allows spot yuan to trade as far as 2% on either side of the midpoint each day.
“The PBOC is sending a strong signal that they are still comfortable with more yuan appreciation, and willing to accommodate further currency gains in light of a weaker dollar,” said Khoon Goh, head of Asia research at ANZ.
“Even with the fix today, the CFETS index still fell, so there is still plenty of room for the PBOC to accommodate more yuan appreciation.”
Based on Friday’s midpoint, the yuan’s value against major trading partners as measured by the trade-weighted CFETS index fell to the lowest this year of 98.24.
In the spot market, onshore yuan strengthened 0.05% to 6.9635 a dollar as of 0340 GMT, while its offshore counterpart traded 0.07% firmer at 6.9592.
Though the guidance appear strong, since November the central bank has been setting midpoint weaker than market expectations.
Friday’s fixing was 448 pips weaker than a Reuters estimate of 6.9481, the largest weak-side deviation since data became available in 2022.
A breach of 7 in the midpoint was “likely a calibration rather than a shift that should be immediately interpreted as a sustained appreciation trend,” said Marco Sun, chief financial market analyst at MUFG (China).
Sun said recent strength was underpinned by heavier seasonal demand for the yuan on the back of China’s record trade surplus.
Resilient exports have driven sizable cash inflows, reflected in large-scale capital repatriation toward the year-end. Chinese banks booked a net foreign currency inflow of $1001.1 billion in December, the most on record, official SAFE data showed.
And exporters usually settle more foreign exchange receipts for various payments including employee bonuses ahead of the Lunar New Year holiday, which falls in mid-February this year.
“Going forward, the key test will be whether the exchange rate can stay firm once peak FX conversion passes and seasonal support fades,” MUFG’s Sun said.
PBOC Governor Pan Gongsheng told state news agency Xinhua this week that the central bank will maintain currency flexibility while fending off “overshooting” risk in exchange rates. Pan also said there is still room to cut interest rates and lower the amount of cash banks must hold in reserve this year.
Investor positioning across Asian currencies shifted further in favour of the yuan, with long bets climbing to a near 16-year high, a Reuters poll showed on Thursday.
(Reporting by Shanghai Newsroom; Editing by Muralikumar Anantharaman)
