China Signals Confidence in Yuan With Surprising Rate Decision

(Bloomberg) -- The unexpected move by the People’s Bank of China to maintain borrowing costs is a sign of confidence the yuan can withstand selling pressure, according to analysts.

The PBOC on Thursday kept yuan funding costs on hold even after its U.S. counterpart pushed dollar rates higher and forecast a faster pace of tightening, narrowing the interest premium against the greenback to test the officials’ comfort zone. The exchange rate is no longer the major concern for the Chinese central bank when it comes to monetary policy, according to Citic Securities Co.

"It appears that the PBOC holds strong confidence on yuan stability and even a symbolic hike in reverse repo yield is not needed," Mizuho Bank senior currency strategist Ken Cheung wrote in a note. Capital inflow from foreigners is likely to keep the yuan supported throughout this year as China opens up its bond market, he said.

It’s been a good year so far for the yuan, appreciating 1.8 percent against the dollar to become the world’s second-strongest Asian currency. Against a trade-weighted currency basket of peers, it’s trading near a two-year high as foreign investors’ appetite for Chinese sovereign bonds drive inflows and MSCI Inc.’s inclusion of domestic shares into its main indexes fuel northbound purchases through Hong Kong stock links.

The PBOC’s decision came as May data showed growth is losing steam in the world’s second-largest economy. China is now prioritizing concerns about domestic economic headwinds amid a gradual rise of credit risks and falling aggregate financing, Citic Securities Co. head of fixed-income research Ming Ming wrote in a note.

The yuan rose 0.1 percent onshore to 6.39 yuan per dollar as of 3:16 p.m. in Shanghai, while it was little changed offshore. The one-month implied volatility of the currency onshore tumbled to the lowest this year.

©2018 Bloomberg L.P.

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