Chinese yuan closed at 28-month low despite new policy move, approaching daily minimum

Chinese yuan closed at 28-month low despite new policy move, approaching daily minimum

SHANGHAI (Reuters) – The Chinese yuan ended the local trading session at a new 28-month low against the dollar on Monday, close to a bearish trading frontier, despite the central bank taking steps to curb the currency’s weakness.

The People’s Bank of China (PBOC) said it will raise the foreign exchange risk reserves of financial institutions when buying foreign currencies through futures contracts to 20% from zero starting September 28.

Dealers said the announcement, along with another firmer-than-expected daily fix, was aimed at slowing the yuan’s depreciation by making it more expensive to bet on it.

“This could stem further negative future stances for the yuan and slow the pace of its decline,” MyBank analysts said in a note.

Before the market opened, the People’s Bank of China (PBOC) set the midpoint rate at 7.0298 per dollar, 378 points or 0.54% weaker than the previous fix of 6.992 on Friday, the weakest since July 7, 2020.

However, traders and analysts said the midpoint continued to emerge much stronger than market expectations for the 23rd consecutive session.

Setting the official daily midpoint limits trading in a narrow range of 2% higher or lower, and Monday’s guidance maintained the range between 6.8892 and 7.1704.

The inland yuan ended the local session at 7.1464 against the dollar, its weakest close since May 28, 2020 – reflecting broad declines in other currencies amid a sweeping dollar rally thanks to the US Federal Reserve’s rapid tightening of monetary policy.

The local yuan reached an intraday low of 7.1690, 14 points from the lower end of the trading range.

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“The market is about to hit the limit,” said a trader at a foreign bank.

A second trader at a foreign bank said that dollar buying was heavy as many corporate clients rushed to seize the last opportunity to secure dollar forward calls before the RRR hike went into effect on Wednesday.

However, market participants believe that more policy measures will be introduced if the yuan’s weakness persists.

“Given the weakening level of the Chinese yuan, the People’s Bank of China (PBOC) is likely to introduce measures to remove the unilateral market decline of the Chinese yuan against the US dollar in the near term,” said Li Lin, head of global markets research for Asia at MUFG. Bank.

Lee expects further reductions in the amount of foreign currency that foreign exchange banks must hold as reserves, after cutting it earlier this month.

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