SHANGHAI- China’s yuan rebounded from a three-week low against the US dollar on Thursday, underpinned by hopes of an end to the war in Ukraine and a consistently firmer daily fix by the People’s Bank of China.
Optimism over prospects of a peace deal between Ukraine and Russia helped riskier assets and kept the dollar on the defensive despite a jump in Treasury yields as hot inflation threatens to close the door to any policy easing in the US this year.
Prior to the market opening, the PBOC set the midpoint rate around which the yuan is allowed to trade in a 2 percent band, at 7.1719 per dollar – 1,281 pips firmer than a Reuters’ estimate.
“Implied vol on USD/CNH has dropped to the lowest levels in months as the PBOC doggedly caps USD/CNY,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.
The defense of USD/CNY is likely to be maintained through the “two sessions” meetings, Tan said. Parliamentarians and political advisers will gather in Beijing in early March for two parallel sets of meetings called “Two Sessions”.
In a note to clients, Maybank analysts said that the yuan could move towards 7.2180 on the dollar if China and the US manage to strike a deal over tariffs.
“Keeping the yuan from depreciating would be a sign of goodwill but PBOC may allow the fix to rise above the 7.20 at one point should tensions escalate or talks come to an impasse,” the analysts said.
With a multi-front trade war, the dollar is actually strengthening against most currencies, and not just against the yuan, they added.
US President Donald Trump said he would impose reciprocal tariffs as soon as Wednesday evening on every country that charges duties on US imports, in a move that ratchets up fears of a widening global trade war and threatens to accelerate US inflation.
