China’s control of daily yuan level at degree last seen in 2010
China’s iron-clad grip on the yuan has reached a level not seen for well over a decade in its daily reference rate, raising the risk of a buildup of currency pressure that may one day have to be released.
The People’s Bank of China kept the so-called fixing for the managed currency little changed on Monday, not reacting to last week’s late rally in the yuan on the back of broad dollar weakness. The PBOC has kept such a tight range on the reference rate — its favorite tool for guiding the currency — that a gauge of its swings has collapsed to levels last seen in 2010.
Slumps in volatility to similar levels over the past decade have often preceded a sizeable move in the yuan.
“If the PBOC were to loosen its guidance on the yuan, short-sellers would see it as another window to do the trades,” said Zhou Hao, chief economist at Guotai Junan International in Hong Kong. Beijing may not ease its control before the yuan rises beyond 7.15, he added.
The PBOC has spent much of the year trying to steady its currency which has fallen to a 16-year low against the dollar. But despite some benefits to the economy from a weaker yuan, Beijing is wary of giving the message that it’s greenlighting depreciation, which could result in even sharper declines and worsen capital outflows.
“Without persistent FX market measures, dollar-yuan could have easily rebounded above 7.50,” a team from Societe Generale SA including Michelle Lam wrote in a recent note. “External factors such as the stronger dollar on the back of higher Treasury yields will likely keep exerting upward pressure on dollar-yuan.”
The SocGen team has a year-end forecast for the currency of 7.45 per dollar. It traded at just under the 7.29 level on Monday.
Following a similar but shorter period of steadiness in the spring of 2022, the yuan tanked nearly 7% in a month amid quickly souring sentiment toward the impact of the Covid-Zero policy on China’s economy. And in 2019, after about three weeks of ironclad control, the PBOC let go and swung back and forth from its weakest since the global financial crisis.
This time traders are eyeing an escalation of monetary easing by Chinese authorities or a spike in the US dollar as potential catalysts to break the yuan out of its range. A volatile Chinese currency is capable of impacting local equities and sending shockwaves across regional markets.
The yuan has fallen about 5% against the dollar so far this year, the third worst performer in the region after the Japanese yen and Malaysian ringgit.
“China’s current currency policy doesn’t make fundamental sense to me, when the economy is still struggling and the PBOC is expected to ease monetary policy further,” Alvin Tan, head of Asia FX strategy at RBC Capital Markets in Singapore, said last week. “This currency policy will have to end sooner or later,” adding that “pegging” the yuan against the dollar at 7.3 is not sustainable.