(Bloomberg) — The yuan weakening past a level that China had been defending throughout December has returned the spotlight to its daily reference rate for the managed currency to gauge Beijing’s appetite to support it.
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Currency traders are waiting to see if the People’s Bank of China will set the so-called fixing at a level weaker than 7.2 per dollar, a closely watched line, around which the yuan is allowed trade in a 2% range. The PBOC maintained support on Friday, but the onshore yuan breached the psychological milestone of 7.3 per dollar for the first time since late 2023, amid concerns over China’s economic struggles and a widening bond yield discount to the US.
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The fixing is Beijing’s preferred tool to guide yuan expectations and has been stronger than 7.2 since the US election amid pressure from a rising dollar and increasing predictions from analysts that the central bank would buckle. Allowing a breach risks sending a signal to traders that the PBOC is comfortable with further yuan weakness, while holding the line suggests it may dig in for a fight with currency stability as a goal.
While the yuan has weakened against the dollar, it climbed to the highest since 2022 versus trading partners’ exchange rates as a result of Beijing’s control. That’s a move that may undermine the nation’s export competitiveness.
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China’s currency traded just over the 7.32 per dollar level onshore on Friday.
“All eyes are on PBOC Monday and the fixing for the Chinese yuan,” said Bob Savage, head of markets strategy and insights at BNY in New York. “Market risk is now for 7.45 or higher dollar against yuan.”
–With assistance from Iris Ouyang, Wenjin Lv and Neha D’silva.
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