SHANGHAI - China’s renminbi pared losses seen on March 22 after the central bank signalled its support for the managed currency via a stronger-than-expected daily reference rate.
The People’s Bank of China (PBOC) set the renminbi’s fixing at 7.0996 per US dollar on March 25 versus 7.2222 as forecast by analysts in a Bloomberg survey – the largest strengthening bias since November. The fixing was set at 7.1004 in the previous session.
The onshore renminbi rose as much as 0.5 per cent to 7.1902 per US dollar, the most since December.
State-owned banks dumped dollars onshore and there were signs of tightness in offshore renminbi liquidity, which also supported the currency, according to traders who asked not to be named.
“Today’s fixing is a clear signal from the authorities that they do not intend to allow further weakening in the renminbi,” said Mr Khoon Goh, head of Asia research at Australia and New Zealand Banking Group. “Last Friday’s moves were an overreaction by the market, and today’s fixing is firmly aimed at correcting that perception.”
China’s currency has been a source of stability in the global forex market and an anchor for its regional peers, according to strategists.
A signal from officials that they are open to letting the renminbi weaken risks increasing volatility, which may spill over into regional and global currency markets.
The onshore renminbi dropped the most in more than two months on March 22 as traders bet that day’s fixing suggested officials were open to depreciation. It weakened through the closely watched 7.20 level against the US dollar, which had acted as a key support since November.
“We expect the PBOC to guard against further renminbi weakness for now and smooth any sharp jumps in CNY/CNH after witnessing the market reaction last Friday,” said TD Securities macro strategist Alex Loo.
Support for the renminbi is vital for its stability in 2024, with the Chinese economy still facing a slew of woes including a property downturn and weak market sentiment. The central bank faces a delicate balancing act, trying to maintain supportive monetary policy while keeping capital outflow pressure contained amid a resilient dollar.
The renminbi may still depreciate towards levels seen in 2023, but the pace will be gradual, according to RBC Capital Markets.
Head of Asia FX strategy Alvin T. Tan said that the currency could still revisit the 7.30 per US dollar level going forward, “but it cannot be allowed to happen over one or two days”.
The PBOC signal came after a robust warning from Japan’s currency chief against speculative trading in the neighbouring yen, after recent weakness there.
Vice-Finance Minister for International Affairs Masato Kanda told reporters on March 25 that Japan will take appropriate action, with nothing ruled out.
Saxo Markets head of FX strategy Charu Chanana said that the Chinese authorities may have concerns about the competitive aspect of a weaker yen, which could heighten if the yen continues to slide.
At around 151 per US dollar, the Japanese currency is not far off a more than three-decade low.
If the yen weakens past 152 per US dollar, “we could likely see the PBOC letting the onshore renminbi weaken further towards 7.25”, she said. BLOOMBERG
