(Bloomberg) — China maintained its tight grip on the yuan with its daily reference rate, as an overnight rally in the dollar threatened to derail sentiment toward the managed currency and its Asian peers.
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The People’s Bank of China set the so-called fixing at 7.1887 per dollar, 1,528 pips stronger than the average estimate in a Bloomberg survey of traders and analysts. The widening of the gap, which hit the largest since April on Wednesday, is a show of policymakers’ intention to avoid sharp yuan declines.
The move came as an advance in the dollar, a result of surging Treasury yields and resilient US economic data, sent the offshore yuan closer to its weakest ever. Asian currencies including Korean won, Thai baht and Philippine peso also retreated.
“The PBOC appears determined to support the yuan,” said Alvin T. Tan, head of Asia FX strategy at RBC Capital Markets. The central bank is aiding the currency “not just with the onshore daily fixes, but also through the extremely high offshore funding rates.”
China’s currency was little changed offshore around the 7.34 per dollar level after the fixing.
For months, China has been trying to strike a balance between easing monetary policy to aid growth and supporting the yuan to avoid massive capital outflows. However, a yawning interest-rate discount to the US, looming tariff-hike threats and a sluggish economic recovery locally are putting pressure on the currency despite the PBOC’s support.
The central bank has been using the fixing, which limits moves in the onshore yuan to 2% on either side, to stem currency losses. A surge in yuan’s borrowing costs in Hong Kong this week also reflects expectations among traders that PBOC will enlist other tools to damp bearish bets by squeezing offshore liquidity.
In a clear sign of official concerns, the central bank vowed in a readout of its latest quarterly monetary policy meeting to crack down on behavior that disrupts the market and prevent the building of one-sided bets as well as any overshoot in the exchange rate. Local media outlet Yicai reported on Monday that the PBOC was planning to increase bill auctions in Hong Kong.
“We continue to see upside risk for dollar-yuan and it is a matter of time before PBOC would be compel to shift the dollar-yuan fixings higher,” said Wee Khoon Chong, senior APAC market strategist at BNY.
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