PBoC fixings support yuan as two forces keep CNH range-bound

The People's Bank of China is propping up the yuan with stronger daily fixings, but safe-haven dollar demand from Middle East tensions is preventing any meaningful CNH appreciation.

The People's Bank of China set its yuan fixing at a stronger-than-expected level for a third consecutive session on Friday, supporting the offshore yuan even as safe-haven demand for the US dollar capped gains and kept USD/CNH locked in a narrow trading band.

"The PBoC is using its daily fixing to signal discomfort with yuan depreciation, but the dollar's safe-haven bid from geopolitical risk is absorbing the impact," said Kiyong Kim, FX strategist at Samsung Securities. "The result is a pair that's stuck until one of these forces breaks."

The offshore yuan traded near the 7.28 level against the dollar on Friday, holding within a tight intraday range after the PBoC set the midpoint at 7.13 per dollar, stronger than the previous session's 7.14 fixing. The dollar index edged lower to 100.5, paring earlier gains as softer-than-expected US inflation data reduced expectations for further Federal Reserve rate hikes. The June core PPI rose 0.1% month-on-month, below the 0.2% consensus, following a similarly cool CPI reading earlier in the week. The US 10-year yield fell 4 basis points to 4.53%, reflecting the repricing of rate expectations.

The tug-of-war between PBoC support and dollar demand has kept USD/CNH range-bound for weeks, but a decisive breakout in either direction would carry significant implications for global markets. If the PBoC prevails, yuan appreciation would boost Chinese equities and reduce import costs for commodity buyers, particularly for iron ore and copper. If dollar demand dominates on escalating Middle East tensions, a weaker yuan would pressure other emerging-market currencies and benefit Chinese exporters at the expense of regional competitors. The PBoC's last major adjustment to the fixing mechanism came in October 2023, when it widened the counter-cyclical factor to stem depreciation pressure during a previous dollar rally.

The onshore yuan (CNY) traded at 7.24 per dollar, reflecting a narrower gap with the offshore rate than in recent weeks, suggesting reduced speculative pressure. The CSI 300 index of A-shares edged up 0.3% on Friday, supported by the stable currency backdrop, while Hong Kong's Hang Seng Index slipped 0.5% as tech stocks weighed.

The PBoC's next 1-year medium-term lending facility (MLF) rate decision is due on July 24, with markets pricing a 10-basis-point cut to 2.40% to support the economic recovery. A cut would widen the rate differential with the US, potentially adding to depreciation pressure on the yuan and testing the PBoC's commitment to the current fixing strategy.

This article is for informational purposes only and does not constitute investment advice.