Yuan near one-week low as dollar strength weighs; PBOC shifts to defence

HONG KONG: China’s yuan eased to a one-week low against the US dollar on Wednesday, as the greenback strengthened on Gulf tensions while the PBOC turned defensive to defend pressure on yuan. The yuan was last 0.08% lower at 6.7994 to the dollar, the weakest level since June 29. Its offshore counterpart traded flat at 6.8027 yuan per dollar. The dollar stood tall at a week-high against most of its peers in early Asia trade, as the bids for safe-haven currency resumed after the US unleashed a new wave of strikes against Iran and revoked a licence allowing the country to sell oil after three tankers were attacked in the Strait of Hormuz. Prior to the market opening, the People’s Bank of China set the midpoint rate at 6.8077 per dollar, 59 pips weaker than a Reuters’ estimate. The spot yuan is allowed to trade a maximum of 2% either side of the fixed midpoint each day. The central bank has been setting the guidance weaker than market projections in recent months as it aims to manage the pace of appreciation. However, the fixing gap has narrowed significantly from over 500 pips seen at times over the past month, a clear sign that the policy stance is becoming more defensive as the dollar stays firm and Asian currencies continue to weaken, according to Wee Khoon Chong, APAC macro strategist at BNY. “The rapid normalization indicates policymakers’ concern has shifted from restraining RMB appreciation to guarding against renewed depreciation pressure if broad USD strength persists,” he added. The yuan is now down 0.2% against the dollar this month but remains 2.9% firmer so far this year. Goldman Sachs expects it to continue outperforming other currencies despite pressures brought by dollar strength, as the policy preference and market expectation for gradual yuan appreciation remain intact. “We expect USD/CNY to stay range-bound through the summer,” with increased exporter conversion on dollar strength helping cap upside, analysts at the bank said in a note.