China signals support for yuan with currency fix stronger than 7 per US dollar

The People's Bank of China set the yuan fixing at 6.9779 per dollar. PHOTO: AFP

SHANGHAI (BLOOMBERG) - China set its daily yuan fixing stronger than the key 7 per US dollar level on Tuesday (Feb 4) in a signal of support even as the currency weakened past the key level on Monday.

The People's Bank of China set the yuan fixing at 6.9779 per dollar. That compares with the 6.9784 average estimate in a Bloomberg survey of traders and analysts. Traders are watching closely this week to see if the central bank will set the daily reference rate at or weaker than 7 for the first time since Dec 25.

Following the spot rate with a setting weaker than 7 would have signaled authorities' concern over the wider economic impact of the coronavirus, according to Nathan Chow, an economist at DBS Bank in Hong Kong. But holding a line stronger than 7 demonstrates an effort to stabilise sentiment, he said. The fixing limits the onshore yuan's moves to 2 per cent in either direction.

"It's not just the virus - the economy had already been slowing down since last year," Chow said. "There was a rebound in December but it proved to be short-lived." It may take a few days for the fixing to break 7 but it could happen within this week, he added.

The yuan's drop on Monday came despite the central bank setting its daily fixing at a stronger-than-expected level. China's financial markets took a beating across almost every asset class as investors weighed the impact of the deadly disease that has killed at least 425 and infected 20,000.

The currency held stronger than 7 from late December through January as trade tensions eased and China's economy looked to be on steadier footing. The phase-one trade deal between the US and China included a currency pact to avoid manipulation to gain an advantage.

Market watchers had recently revised yuan forecasts amid rising confidence that China had arrested an economic slowdown. Now, some economists are predicting the impact of the virus on China's economy may be severe, and potentially larger than that of 2003's Sars outbreak.

The daily fixing is calculated with formulas that take into account factors such as the previous trading day's official close at 4:30pm, the yuan's move against a basket of currencies and the moves in other major exchange rates.

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