China’s central bank guided the yuan to its biggest one-day jump in roughly five months Thursday, the latest sign that authorities are seeking to bolster the currency in the wake of the downgrade of the country’s sovereign debt by Moody’s Investors Service last week, the Wall Street Journal reports.
The People’s Bank of China set the dollar’s daily midpoint for trading at 6.8090 yuan, meaning the yuan was at its strongest since Nov. 10. This strong “fix”, which takes into account where the yuan finished trading the day before, came after the currency surged against the dollar in onshore trading Wednesday.
The yuan rose even higher after trading began at 9:30 a.m. local time Thursday. That is a change from recent weeks, when the central bank guided the yuan to stronger-than-expected levels, only to watch it weaken once trading began.
Shifting expectations about the yuan’s short-term fortunes are driving the change.
The central bank tweaked the mechanism for setting the daily fix last Friday, in effect taking even more control over the value of the yuan—which has helped persuade investors that it is committed for now to strengthening the currency.
The new method could also help smooth swings against the dollar. As a result, many analysts have revised their forecasts for the yuan, and now project a smaller decline or even a slight gain for this year.
“What the PBoC is telling investors is that the [yuan] can appreciate against the US dollar,” said Larry Hu, China economist at Macquarie .
The central bank has been intervening in the onshore market in recent days, traders say, directing state-owned banks to buy yuan and sell dollars to prop up the currency. Without that intervention, the yuan wouldn’t have become so strong, said a Shanghai-based senior trader with a domestic bank.
“The key question for everyone now is when the PBoC will let this round of appreciation end,” the trader said. “These are quite uncertain times for yuan traders.”
Soaring borrowing costs for the yuan in Hong Kong have also propelled the Chinese currency higher outside of China, where it trades more freely.
That overnight yuan borrowing rate hit 42.82 percent on Thursday, up from 21.08 percent on Wednesday. The offshore yuan rose as much as 0.3 percent from its level late Wednesday before giving up its gain; it was recently down 0.2 percent at 6.7591 to the dollar.
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