PBoC sets softer yuan fix to curb rapid appreciation

The People’s Bank of China set the onshore yuan’s daily midpoint at 6.8198 per dollar on June 8, 248 pips softer than market estimates. The midpoint anchors trading and allows the yuan to move about 2% either side; the spot rate that day was 6.7837 and the currency was 3.1% stronger year-to-date.

By placing the reference rate weaker than expected, the central bank made it easier for the currency to trade slightly weaker within the allowed band. Several Chinese banks have raised dollar deposit rates recently, encouraging savers to hold dollars rather than convert into yuan and reducing upward pressure on the currency.

A stronger yuan reduces the amount of yuan exporters receive when they convert foreign-currency revenues, which can squeeze margins for manufacturers that sell abroad.

China International Capital Corporation wrote that the yuan’s moves are “broadly tracking the dollar index but with notably lower volatility.” Analysts at Huatai Futures added that the currency’s resilience “suggests that the drivers of the exchange rate have shifted beyond the interest rate gap, increasingly reflecting stronger FX settlement flows and improved sentiment toward yuan-denominated assets.”

The yuan has strengthened while the US dollar rose after a stronger-than-expected US jobs report and as markets price in a potential Federal Reserve rate increase. The yuan’s performance has made it one of the better-performing emerging-market currencies since the start of the Iran conflict, reflecting net capital flows and settlement activity into Chinese markets.

Oil prices climbed more than $2 per barrel on Monday after reports of renewed Israeli strikes in Lebanon. Higher oil costs can raise import bills and affect inflation, factors that interact with exchange-rate dynamics.

China will publish trade and inflation figures this week while the United States releases consumer-price data. Those reports over the next 72 hours are likely to influence currency markets and could affect whether the yuan’s recent strength continues.

The PBoC’s daily midpoint is one of several tools authorities use to manage onshore exchange-rate moves. By setting a softer midpoint the bank allows a bit more room for the yuan to weaken inside the trading corridor, while changes in foreign-currency deposit rates can shift investor and saver behavior. Chinese authorities have intervened at times to prevent rapid moves in either direction, balancing export competitiveness with financial stability.