Despite the central bank taking attempts to contain the currency's decline, the Chinese yuan on Monday hit a 28-month low versus the dollar and was just a few cents away from its negative trading limit.
On Sept. 28, the People's Bank of China (PBOC) announced that it will increase the foreign exchange risk reserves for financial institutions when they buy foreign exchange through currency forwards from zero to 20%.
By making it more expensive to bet against the currency, the statement was intended to curb the rate of yuan depreciation, according to dealers, along with another firmer-than-expected daily midpoint fixing. "This could stem further forward positions that have been negative for the yuan and slow its depreciation pace," analysts at Maybank said.
The PBOC set the midpoint rate at 7.0298 per dollar before the market opened, which is 378 pip (0.54%) worse than the previous fix of 6.992 from last Friday, which was the lowest since July 7, 2020.
For the 23rd straight trading session, the midpoint continues to come in substantially stronger than market expectations, according to dealers and analysts. It outperformed Reuters' prediction of 7.0019 by 279 pip. The onshore yuan is only permitted to trade in a restricted range of 2% above or below the official daily midpoint fixing, and Monday's guideline maintained the range to be between 6.8892 and 7.1704.
The onshore yuan began trading at 7.1400 per dollar and fell to a low of 7.1690 at one point, the worst level since May 27, 2020, following similar declines in other currencies after a broad dollar surge fueled in part by the U.S. fast tightening of monetary policy by the Federal Reserve. At noon, it was trading at 7.1662, down 364 pip from the previous late session finish. And the distance between the noon level and the bottom bound of the trading band was 42 pip. A trader from a foreign bank declared, "the market is almost hitting the limit."
However, market participants think that should the yuan's weakness continue, more policy measures would be implemented. "Given the weak CNY level, it is likely that PBOC would roll out measures to remove market's one-side depreciation of CNY against the U.S. dollar in the near term," Li Lin, head of global markets research for Asia at MUFG Bank said.
After a drop earlier this month, Li anticipates future reductions in the amount of foreign currency reserves banks must maintain. The offshore yuan was trading at 7.1704 per dollar at lunchtime, while the global dollar index was trading near its two-decade high of 113.996.
