China's central bank is welding a lid on USD/CNY
Nov 21 (Reuters) -Bets on the yuan depreciating aren't getting much traction anymore, as China's central bank welds a tight lid on USD/CNY using the daily midpoint that determines its daily trading bandwidth.
For more than a week, the People's Bank of China has been applying a counter-cyclical adjustment factor to the USD/CNY fixing, keeping it under the psychological benchmark of 7.2000. The upper limit for spot has hence been hovering just below 7.3500.
The fixing's deviation from neutral forecasts has recently increased to counter the U.S. dollar's near-relentless rise, suggesting the PBOC is using dynamic damping to fend off yuan bears. Thursday's fix showed a deviation of around -550 pips from approximately -300 pips last Wednesday.
The strategy appears to be barely working, with USD/CNY and USD/CNH still elevated near four-month highs; dollar longs are in no rush to capitulate despite the strong signal of authorities' intolerance for further yuan weakness.
Along with other Asian FX authorities, most notably Japan's, the PBOC has its work cut out, as markets continue to price in the worst-case scenarios of the incoming Trump administration implementing inflationary economic policies.
For now, the uncertainty caused by Trump's historic election victory has made market instability a prime concern for Asian market authorities. Until more clarity as to the extent of Trump carrying out his tariff threats, don't expect China to free the yuan up.
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(Ewen Chew is a Reuters market analyst. The views expressed are his own.)
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