The PBOC enforced its currency cooling strategy by raising the foreign exchange reserve requirement ratio by 2 percentage points to 6%. Following this liquidity move, policymakers set the daily reference rate at 6.7180 per dollar, which fell 369 pips short of market projections. These concerted actions pushed the onshore rate to 6.6832 and nudged the offshore unit down to 6.6782 in early dealings. The pullback also reversed gains in the CFETS yuan basket index, which slipped to 103.75 after touching a 52-month high a day earlier.
Key points
Chinese monetary authorities are using administrative ratios and midpoint fixings to prev…: Chinese monetary authorities are using administrative ratios and midpoint fixings to prevent rapid currency appreciation.
The regulatory interventions successfully halted a record run that lifted the trade-weigh…: The regulatory interventions successfully halted a record run that lifted the trade-weighted currency basket to a 52-month peak.
Traders remain cautious as domestic intervention coincides with political and fiscal unce…: Traders remain cautious as domestic intervention coincides with political and fiscal uncertainty surrounding U.S. midterm election outcomes.
Sources checked by our analysis pipeline: 1
The onshore yuan fell to 6.6832 per dollar in early trading, its weakest level since October 19, before recovering slightly to 6.6794 as of 0303 GMT. The offshore yuan also declined, trading at 6.6782 per dollar, down around 0.13% during Asian trade.
The weakness followed the People's Bank of China's (PBOC) decision on Tuesday to raise the foreign exchange reserve requirement ratio by 2 percentage points to 6% from 4%. The move is aimed at limiting the supply of foreign currency in the domestic market and slowing the yuan's appreciation.
The decision marks one of Beijing's strongest attempts yet to rein in the currency's rally, which has seen it appreciate around 5% against the dollar so far this year.
The PBOC set its daily midpoint rate at 6.7180 per dollar on Wednesday, the weakest level since October 23. The fixing was 369 pips weaker than the Reuters estimate of 6.6811, signalling the central bank's preference for a more gradual pace of currency appreciation.
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