China's Yuan Is Locked in a Tussle Between PBOC and Traders

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  • Central bank is using fixing to guide currency higher
  • That’s not stopped yuan from closing weaker in recent days

Almost every day, China’s central bank pushes up the yuan and traders push it down.

Officials have used the daily fixing to guide the currency higher against the dollar for eight of the past nine days, surprising market watchers with its strength. That’s failed to inspire confidence in the yuan, which has closed lower than the reference rate on all but one of those days. On Thursday last week, the yuan ended 0.4 percent weaker than the fixing, the biggest discount since January’s bout of volatility.

The tug-of-war illustrates the tension at the heart of China’s currency market. As a campaign to cut risk in the financial sector weighs on the nation’s bonds and stocks, the authorities are keen to maintain stability in the yuan -- as expressed through the stronger-than-expected fixings -- and limit outflows. Yet, with the deleveraging campaign showing little sign of ending, and an economic rebound looking shaky, traders see a weaker outlook for a currency that’s still slumping against peers outside the dollar.

"The PBOC’s efforts to boost confidence with fixings haven’t been bearing fruit," said Andy Ji, Singapore-based currency strategist at Commonwealth Bank of Australia. "The market is not buying the signal and is still pessimistic."

While the yuan is barely changed against the greenback this year, a steadiness not seen since the August 2015 devaluation, the same can’t be said about its moves versus others. Partly thanks to a depreciating dollar, the yuan has fallen against 14 of its 17 major peers this year, including declines of at least 6 percent against the South Korean won, the euro and the Taiwan dollar.

Outflows also seem to be picking up, with mainland lenders almost doubling the net amount of foreign currency they sold to clients last month, amid rising bets the U.S. will increase borrowing costs next month. Analysts project the yuan will fall by 2.3 percent to 7.05 per dollar by the end of the year, according to data compiled by Bloomberg.

Depreciation pressure is also being felt in the derivatives market, with the extra cost for options to sell the currency against the dollar versus the contracts to buy surging to 1.04 percent on Monday, the highest level since March 13.

— With assistance by Emma Dai, and Tian Chen

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