China Central Bank Slows Yuan’s Rise as it Grows Against Dollar

The yuan traded at 6.7837 per dollar on Monday, June 8, and is 3.1% stronger against the dollar year to date. But, China’s central bank is doing something very unusual: trying to stop its own currency from rising.

The recent rise has made the yuan one of the best-performing emerging-market currencies since the Iran war began. This is despite the US jobs report, which doubled forecasts, driving the US dollar to a two-month high against the euro, the Australian dollar, and the New Zealand dollar. The yuan is strengthening even as the dollar strengthens against almost everything else.

Why China’s PBoC is Slowing the Yuan’s Rise

The People’s Bank of China set its daily midpoint fixing on Monday, June 8, at 6.8198 per dollar, a full 248 pips (small units of currency movement) softer than the Reuters consensus estimate.

The PBoC sets a reference rate each day around which the yuan can trade 2 per cent in either direction.

Setting it softer than expected is a deliberate signal: do not let the yuan rise too fast. Several Chinese banks have also raised dollar deposit rates in recent weeks, encouraging savers to hold dollars rather than convert them into yuan, easing pressure on the yuan’s appreciation.

A too-strong yuan directly hurts Chinese exporters. Firms that earn dollars abroad and convert them into yuan at home receive fewer yuan per dollar when the currency rises, squeezing margins across China’s manufacturing base.

What is Actually Driving Chinese Yuan Strength

Analysts at China International Capital Corporation (CICC) wrote in a Monday note that the yuan’s moves are “broadly tracking the dollar index but with notably lower volatility.”

Huatai Futures analysts went further, arguing the yuan’s resilience “suggests that the drivers of the exchange rate have shifted beyond the interest rate gap, the difference between US and Chinese borrowing costs, increasingly reflecting stronger FX settlement flows and improved sentiment toward yuan-denominated assets.”

The yuan is outperforming despite the dollar near a two-month high and the Federal Reserve pricing in a rate hike. Real capital flowing into Chinese assets explains the divergence, but oil complicates the picture.

Prices rose more than $2 per barrel on Monday after Israel launched renewed strikes on Lebanon, eroding ceasefire hopes and removing the prospect of a Strait of Hormuz reopening.

According to Reuters, China is releasing its trade and inflation data this week alongside US CPI on Wednesday, making the next 72 hours the most data-intensive period of the month for global currency traders.

The PBoC is managing a problem most central banks do not face: its currency is too resilient. Whether that holds through a week of simultaneous US and Chinese data releases will set the dollar’s direction for the rest of June.