China's Effort to Support the Yuan

The People's Bank of China (PBOC) sent an important message through the reference exchange rate level it set to prevent the yuan from depreciating, which is heading towards its weakest level since 2007. The bank set the dollar/yuan peg at 7.2076, below the average expectation of 7.2994 in a Bloomberg survey. This marked the largest difference between expectations and the peg since October. The People's Bank of China's move came after the dollar's global appreciation, as well as weak data released in China, sent the onshore yuan down to its lowest level in 16 years on Wednesday. The yuan's losses deepened this week following the PBOC's surprise interest rate cut to support growth. The selling pressure on bonds also widened the US-China bond yield gap, further increasing pressure on the yuan. The onshore yuan has lost nearly 6 percent of its value since the beginning of the year. The peg decision suggests the PBOC is opting for a more gradual approach to countering extreme volatility in the forex market, but it may not be enough to prevent further depreciation in the yuan, said Redmond Wong, strategist at Saxo Capital Markets.