How Is PBOC Warning Shaping the Chinese Currency Market?

After the central bank warned against speculative trading and large one-way bets on the currency, the Chinese yuan rebounded Thursday from a 14-year low versus the dollar reached in the previous session, ending eight days of losses.

The People’s Bank of China (PBOC) maintained that the yuan has a strong foundation to be stable on Wednesday and stated that it is their top responsibility to stabilize the foreign exchange market. Analysts at Goldman Sachs (NYSE: GS) explained that the PBOC would not defend a specific exchange rate level. However, given that the depreciation was due to the continued appreciation of the broad USD, the statement illustrated the PBOC’s further concerns about the currency’s rapid depreciation.

Yuan Is Being Revalued

The PBOC fixed the midpoint rate at 7.1102 per dollar before the market opened, five pip stronger than the previous fix of 7.1107. Onshore yuan closed the domestic session at 7.2 per dollar on the spot market, 20 pips higher than the previous late-night closing of 7.2020.

On Wednesday, the yuan fell to a low of 7.2521 to the dollar, its lowest level since the 2008 global financial crisis. The offshore yuan also recovered from the day before, when it touched its lowest level in history, to trade at 7.2079 per dollar at about 0830 GMT. According to currency dealers, the PBOC’s vocal warnings and a decline in the dollar index helped raise the yuan in morning trading.

According to a trader at a foreign bank, the warning’s unusually stern tone scared many investors from trying to test new lows for the yuan. On Thursday afternoon, China’s foreign exchange regulator weighed in, announcing that for the FX market to respond to external shocks appropriately in the second half of this year, it will enhance its market-based, counter-cyclical adjustment mechanism. Separately, the yuan is unlikely to weaken significantly, according to a front-page article published Thursday by the state-owned Securities Times.

Typically, market players interpret these official statements and state media commentary as indicating that the government is becoming uneasy about sudden changes in the currency’s value.