MNI: PBOC Persists With Yuan Support For Now-Advisors
The People’s Bank of China has kept to its stance of being prepared to support the yuan despite the imposition of fresh U.S. tariffs, and while the central bank has indicated it will keep a close eye on the volatile trade outlook, traders and advisors told MNI that for now they do not expect significant depreciation against the dollar this year.
The yuan is likely to see continued short-term strength driven by the weakening dollar, with a Shanghai forex trader pointing to 7.24 as a key level over the short term after the euro surged to $1.03. Robust Chinese equity markets have also improved sentiment, which would limit yuan depreciation towards 7.3 to the dollar in the near term, he added. (See MNI: PBOC To Ensure Yuan Stability In Trump's Second Term)
The additional 10% tariffs revealed by U.S. President Donald Trump on March 4 saw the offshore CNH rate weaken past 7.30 on Tuesday, before snapping back to 7.23 the following day. Improved sentiment towards China’s tech and AI sectors had also driven demand for the yuan, the trader said.
The offshore yuan briefly broke 7.24 against the dollar on Wednesday, while the onshore currency closed at 7.2380 on Friday at 16:30pm Beijing time.
A policy advisor told MNI that the yuan is not likely to breach 7.50 this year under current conditions, though the PBOC will continue to watch the forex market closely should tariff pressure grow.
Increased capital outflows, which doubled in 2024 to USD484.2 billion from 2023, partially driven by the widened China-U.S interest spread, has restrained PBOC easing, the advisor said. (See MNI INTERVIEW: China-U.S Yuan Deal Unlikely - Guan Tao)
The PBOC has continued to adjust the strength of its counter-cyclical factor in the daily fixing to control volatility and deliver a signal of support for the yuan, with Governor Pan Gongsheng telling reporters on Thursday that “decisive and timely” measures had helped smooth foreign exchange volatility.
The gap between the official yuan fixing and the market’s estimate narrowed to around 700 pips from Thursday, compared to over 1,000 pips on March 3 and 4, when the additional tariffs pressured the market.
MORE VOLATILITY
However, given the global outlook, volatility could increase after the close of the major annual policy-setting Two Sessions meeting on March 11, the trader said. (See MNI INTERVIEW: Call For PBOC To Boost Support For Stock Market)
The dollar index is also likely to be highly volatile for the foreseeable future, said Wang Qing, chief analyst at Golden Credit Rating International, adding that the Chinese central bank’s tolerance for depreciation could grow over the year should the external economic environment further deteriorate.
A Hong Kong trader noted the dollar index would decline from 104 to around 102 as investors grow more pessimistic about the impact of Trump’s trade policies and as a potentially major boost to European defence and infrastructure spending fuels hopes for eurozone growth.
Funds could flow into emerging-market stocks should they continue to outperform U.S. equity markets, which will also further weaken the greenback, he said, noting the strong support signalled by authorities this week for China’s tech sector.
Forecasting the yuan, however, has become increasingly difficult, the Shanghai trader warned, noting that it had gained less in recent days against the dollar than other currencies.
A strong yuan would impose significant pressure on Chinese exporters on top of the new 20% U.S. tariffs, while current economic indicators do not support a long bull stock market, he added.
The performance of the Hang Seng has attracted significant fund flows from the mainland to Hong Kong, which has also weighed on the yuan, the Hong Kong trader said.
