China just put the brakes on a rising yuan



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China’s central bank over the weekend made it easier to bet on a falling renminbi, a signal that authorities want to slow down the currency’s rapid rise.

“I don’t expect this is the beginning of some move by [People’s Bank of China] to take the [dollar/renminbi] pair higher from here. I think at most they are just trying to slow the pace of the down move a bit,” said Brad Bechtel, global head of FX at Jefferies, in a note.

The People’s Bank of China on Saturday announced that beginning Monday financial institutions would no longer have to set aside cash when purchasing foreign-exchange forward contracts for clients. Previously, institutions had to set aside 20% of the previous month’s forward settlement amount as reserves. A forward is a contract that locks in an exchange rate for the purchase or sale of a currency on a certain date.

The move comes after the U.S. dollar on Friday fell to its weakest level versus the Chinese currency in 17 months as China ended a weeklong holiday. In onshore trade, the renminbi
USDCNY,
+0.76%
scored its biggest one-day jump since it was de-pegged from the dollar in 2005 — a move that saw it playing catch-up with action in the offshore market
USDCNH,
+0.76%
over the course of the holiday.

The U.S. dollar rebounded Monday, rising 0.8% in both onshore and offshore activity. The dollar fetched 6.7459 yuan in onshore trade and 6.7452 in offshore dealings.

The ICE U.S. Dollar Index
DXY,
+0.02%,
a measure of the currency against a basket of six major rivals, not including the renminbi, was flat at 93.07.

Currency traders have seen it all before.

“The last time the PBOC reduced the RRR for FX to zero was in September 2017, which similar to now followed a period of rapid renminbi appreciation,” wrote Jason Daw, head of emerging markets strategy at Société Générale, in a blog post. But, he recalled, while that move saw the dollar rally versus the renminbi for a few weeks, the Chinese currency then proceeded to strengthen significantly over the next three months.

Khoon Goh, head of Asia research at ANZ, mapped out the reaction to past RRR moves on Twitter:

Bechtel sees room for USD/CNH to consolidate around 6.75 yuan, while holding in a range of 6.700 to 6.8000 “for a little while. Same will be said for regional currencies, especially the big exporters, who tend to mark against the CNY. ”



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