China’s Speculation Warning Sparks Yuan’s First Rise in Nine Days

China’s mainland yuan rose for the first time in nine sessions after the central bank issued a verbal warning against currency speculation.

The currency rose 0.1%, halting an eight-day fall of about 3%. The rise came after the People’s Bank of China issued a scathing statement late on Wednesday saying that speculators would definitely lose money in the long run and key market participants needed to „protect the authority of the fixing.” The CBR also fixed at a higher than expected level for the 26th consecutive session.

The daily reference rate, Beijing’s most widely used tool for setting yuan expectations, has done little to stem the currency’s downward slide on the back of a rising dollar. For much of the past week, the yuan has traded domestically close to the weak edge of its 2% trading range against the US dollar. This is a sign that traders are sticking to their bearish views on the yuan as the dollar strengthens, and as the local economy suffers from Covid lockdowns and turmoil in the real estate sector.

“The bears are in a trap and the People’s Bank of China’s stern warning is well timed,” said Fiona Lim, senior currency strategist at Malayan Banking Bhd. in Singapore.

However, the dollar-offshore yuan is likely to remain at current levels, with the dollar still the dominant driver of the pair, she said.

The mainland yuan has fallen about 4% against the US dollar this month and is on track for its worst annual loss since 1994.

One of the banks that provides the official fixing quote was trading the yuan at the fixing level when markets opened for the second day in a row, according to traders who asked not to be named because they are not allowed to speak publicly. However, demand for dollar purchases was strong, and the sale of dollars by state banks did not last long, they added. The offshore yuan fell 0.5% to 7.1963 per dollar at 11:33 am local time.

The commentary in the local Securities Times is also aimed at calming the markets, frightened by the weakness of the yuan. The rate at which the yuan has depreciated against the dollar has actually been moderate compared to other currencies, and investors should treat these movements rationally, the report said.

The NBK’s headache is shared by politicians around the world as the dollar continues to rise. China’s central bank is also forced to walk a tightrope between stimulating its economy, which faces a growing risk of recession, without encouraging a weaker yuan. Following an unexpected cut in the key interest rate in August, the NBK suspended monetary policy easing this month. Some economists expect this to delay any major stimulus measures, such as cuts in interest rates and reserve requirements for banks, to avoid further pressure on the currency.

China may be worried about a repeat of 2015, when monetary easing and economic growth problems coincided with a Federal Reserve tightening cycle that depreciated the yuan, as well as reducing foreign exchange reserves by one trillion yuan ($139 billion) through 2016 .

The authorities are cautious about boosting liquidity amid a weak yuan, even as demand for cash picks up sharply towards the end of the quarter and around the Golden Week holidays. Overnight repo rates, a measure of interbank liquidity, fell to their lowest level since early 2021 after the PBOC injected 180 billion yuan on Thursday through open market operations.

RMB trading on the continent will be closed next week for local holidays, leaving the offshore counterpart without a guide ahead of a major party meeting next month. Earlier this week, the People’s Bank of China imposed a 20% risk reserve requirement on banks’ forward currency sales to make short yuan positions more expensive. This is after a previous move to reduce foreign currency reserve requirements for banks.

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