China is extending two lines of currency defense to support the yuan, pushing up funding costs in the offshore market and battling back once more with a stronger-than-expected reference rate for the managed currency.
The People’s Bank of China set its so-called fixing at 7.1992 per dollar compared to an average estimate of 7.3103 in a Bloomberg survey with traders and analysts on Tuesday. That was the largest gap to estimates since the poll was initiated in 2018.
That came a day after one-month forward points, a measure of the cost to borrow the yuan versus the greenback, saw its biggest jump since 2017. The yuan was little changed in offshore trading Monday morning, having touched a year-to-date low last week. China has stepped up support of the yuan in recent months via setting stronger-than-expected fixings, urging state banks to sell dollars and tweaking capital flow rules, although the measures so far have seen little impact. The currency has been dragged down by China’s disappointing growth and its widening yield differentials with the US.
“Tighter CNH liquidity and squeezing of CNH shorts were used in 2017 to counter speculative positioning,” according to a Morgan Stanley note, “The fact the PBOC has used this measure suggests it is quite determined to defend the currency.”
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