China Sets Yuan Fixing Stronger Than Expected, Soothing Nerves

(Bloomberg) --

The yuan steadied on Thursday after China’s central bank set the daily fixing stronger than analysts expected, providing some reassurance to traders rattled by a tumultuous week in markets.

The currency rose as much as 0.3% after the People’s Bank of China set its daily reference rate at 7.0039 per dollar. While that was the first time since 2008 that the fixing was weaker than 7, it tracked earlier moves in the spot rate and was stronger than the 7.0156 average estimate of 21 analysts and traders surveyed by Bloomberg.

The fixing has become a closely-watched event after a weak reference rate on Monday triggered the biggest loss in the yuan since 2015, sparking concern about a global currency war. The latest move comes after the PBOC took steps to calm sentiment, including reassuring foreign companies that the yuan won’t weaken significantly.

“China wants to prevent panic now,” said Gao Qi, a strategist at Scotiabank. “The PBOC will continue to send signals to stabilize the yuan in the near term.”

The yuan is down 3.7% in the past three months, and at its lowest since at least 2015 against a basket of 24 trading partners’ currencies.

Further depreciation is still on the cards. U.S. President Donald Trump has threatened to impose more tariffs on Chinese goods and the PBOC could loosen its monetary policy to aid growth. Central banks in New Zealand, India and Thailand all made surprise interest-rate cuts on Wednesday, stoking fears of a full-on currency war.

Yet China will be keen to avoid the experiences of 2015-2016, when a one-off devaluation spurred companies and individuals to yank money out of the country.

“I suspect the authorities will want to gain more comfort over the next few days and weeks that we’re not seeing a huge intensification of capital outflow pressures, before they possibly allow it to go a little weaker,” said Andrew Tilton, chief Asia Pacific economist at Goldman Sachs Group Inc. “Right now I suspect they want to desensitize the market to this magic number of 7, and make sure that they are not going to have a capital outflow problem.”

The risk is how the Trump administration responds to a weaker yuan. The U.S. this week labeled China a currency manipulator, a formal designation which China rejects. The yuan may tumble to as weak as 7.7 in the event of an intensification of trade tensions, according to Societe Generale SA.

“The further it falls, the more likely the Trump administration will respond with more tariffs and other policies to target China,” said Ben Emons, managing director for global macro strategy at Medley Global Advisors in New York. “All of which points to even more downside in the RMB, which is then a problem for other emerging countries that compete with China,” he said, using an abbreviation of the yuan’s official name.

That means the PBOC’s reference rate is going to continue to be closely watched by traders and central bankers alike.

“The fix is the number one game in town and will continue to dictate the pace of play for risk assets over the near-term,” said Stephen Innes, managing director for VM Markets Ltd. in Singapore. “Nothing else matters at this stage.”

©2019 Bloomberg L.P.