China is starting to slow the yuan’s one-way slide

SHANGHAI/BEIJING, June 27 (Reuters) – China set a stronger-than-expected trade band for its currency on Tuesday and state banks sold dollars against the yuan, market sources said, in the strongest sign, but authorities are growing increasingly uncomfortable with its faster slide .

The yuan has fallen about 4% against the dollar in two months as weakened consumer confidence and a soft property market have lost momentum from the post-pandemic recovery. It bounced around 0.4% on Tuesday, its best gain in nearly two weeks.

State banks sold dollars to buy yuan in the offshore spot market, according to four people familiar with the trades, and the currency appeared to be nearing the psychologically important level of 7.25 per dollar, two of the people said.

Banks were also active late Monday, according to two more traders, as they bid up the yuan sharply into the country shutdown, which affects the central bank’s official yuan midpoint next day.

On Tuesday, the People’s Bank of China (PBOC) set the middle of the band even tighter than expected, deviating from forecast models by the most since May.

Analysts said the moves together showed official unease over the yuan’s downward momentum and could slow, but perhaps not stop, a decline given the bleak economic outlook.

“They are sending more signals now that they are uncomfortable … they would like to slow down the yuan weakness,” said Moh Siong Sim, a currency strategist at Bank of Singapore. “The speed has been too fast for their liking.”

The yuan ended Monday at a seven-month low of 7.2425 per dollar and was at 7.2105 in Tuesday afternoon trade.

“The 7.25 level remains a key threshold,” one of the market sources said, adding that a breach of the level could quickly send the yuan to its 2022 lows.

All the sources spoke on condition of anonymity, as they are not authorized to talk about trades publicly. UBS said in a note that its trading desk saw strong interest among banks in pre-market trades to raise dollars via buy-sell currency swaps, and said there may have been efforts by authorities to neutralize the impact of their spot intervention.

State banks usually act on behalf of the country’s central bank in the foreign exchange market, but they can also act for themselves or their customers.

HIND FOOT

The backlash comes as investors are buzzing about China, with data showing China’s notorious rebound faltering. Still, the stuttering recovery has raised expectations of stimulus to help offset growth concerns.

Shares in Hong Kong (.HSI) and the Australian dollar bounced sharply on Tuesday in tandem with the yuan.

Analysts said moves to stem the yuan’s slide were not yet as firm as last year, when regulators rolled out measures to encourage capital inflows, but could be enough to slow the selloff.

In November, the currency hit a 14-year low of 7.3280 per dollar, while the offshore yuan hit a record low of 7.3746.

“The implications are that markets are going to be more cautious about pushing the dollar/offshore yuan much, much higher from here,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.

At the very least, it could put the brakes on if China’s economy – or the prospect of further interest rate cuts – prevents the yuan from sliding further downhill.

“We have to think about the likelihood of further easing going forward,” said Rob Carnell, ING’s regional head of research, Asia-Pacific.

“What we’ve seen is just the first iteration of the rate cuts we’re going to have. We’re going to have many more of them over the next couple of months,” Carnell said.

“It’s bound to keep the yuan on the back foot.”

Reporting from Shanghai and Beijing Newsroom, Ankur Banerjee, Tom Westbrook and Rae Wee in Singapore; Editing by Vidya Ranganathan, Kim Coghill and Jacqueline Wong

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