Yuan's Ascendancy: PBOC's Signal to Currency Markets

China's yuan reached a near 32-month high against the U.S. dollar, after the central bank shifted the guidance rate beyond the 7-per-dollar mark. This move, indicating potential policy shifts, allows room for more appreciation, while driven by resilient exports and capital repatriation nearing the Lunar New Year.

China's yuan climbed to a near 32-month high against the U.S. dollar on Friday, following the central bank's move to elevate its official guidance rate past the critical 7-per-dollar threshold, marking a first since 2023.

Market analysts suggest this decision could reflect a changing stance on foreign exchange policy. Traders keenly monitor if the central bank intends to permit the official midpoint to fortify beyond 7, suggesting possible acceptance of yuan's growth against the dollar. Prior to Friday's market activities, the People's Bank of China (PBOC) set the midpoint at 6.9929 per dollar, the strongest point since May 17, 2023, enabling deviations of up to 2% from this midpoint daily.

According to Khoon Goh of ANZ, the PBOC is apparently comfortable with further yuan appreciation given the weaker U.S. dollar. This week's midpoint adjustment, though surprising, represents a cautious calibration rather than a definitive policy change. Robust exports, creating significant cash inflows, underline these adjustments as Chinese banks reported record foreign currency inflows last December, driven largely by the seasonal FX demand until the Lunar New Year.

(With inputs from agencies.)