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Yuan Strengthens Sharply on Central Bank Cue
China’s central bank fixes the yuan at the strongest daily reference rate since Jan. 4
China’s currency hit its strongest level this year after the central bank guided it sharply up Monday against a tide of stumbling global financial markets.
After opening stronger against the U.S. dollar, the yuan traded as much as 1.2% higher than the previous close, the largest such move since 2005. The yuan strengthened to 6.4988 against the U.S. dollar and last traded at 6.5014 against the U.S. dollar.
The central bank fixed the yuan almost 1% stronger at 6.5118 than where it closed against the U.S. dollar on Feb. 5, making it the strongest daily reference rate since Jan. 4.
China’s central bank sets a daily reference rate and the yuan is allowed to trade 2% above or below this rate. After vowing to make the daily rate more market-driven in August, in recent months the central bank has sought to guide investors away from this daily reference rate against the U.S. dollar and toward a trade-weighted basket of currencies it unveiled at the end of last year. The index fell to its lowest level since the end of 2014 on Feb. 5.
Analysts from Scotiabank said “the daily reference rate will not be completely determined by the market given its marked spillover effects,” noting that “a string of surging [yuan] fixings could fuel market fears over competitive devaluation,” in a note to clients on Monday.
Meanwhile, stocks in China fell Monday, catching up to losses in markets around the world last week as the mainland reopened following the Lunar New Year holiday.
The Shanghai Composite Index traded down 2.8%, just barely above the 2583 level that would mark a loss of 50% for the benchmark since its recent high last June. Shares in the smaller Shenzhen market were off 3.3%.
Data Monday showed China’s imports and exports continued to deteriorate.
As markets globally have struggled to find a firm footing in the past few weeks, investors have fled to safe haven assets including the Japanese yen, sending the U.S. dollar sharply weaker since early February. Data from the Commodity Futures Trading Commission showed that investors last week cut their bets on the U.S. dollar by $3 billion for the second consecutive week, to the lowest level since October 2014, when the U.S. dollar’s rally began petering out.
Widely cited comments by the People’s Bank of China Gov. Zhou Xiaochuan in local media “signal against the intention for a sharp one-off devaluation, but leave scope for possible further round(s) of gradual depreciation,” analysts from Goldman Sachs wrote in a note to clients Monday.
In the interview posted on the central bank’s website, Gov. Zhou said “in the mind of the central bank, there is not an optimal, model-produced exchange rate level,” adding that “as the next step we will strengthen the reference to a basket of currencies.”
He also said the central bank has “always held the view that the efficient market hypothesis cannot be relied on 100%,” referring to a theory that states market prices fully reflect all relevant information, and there is no way to beat the market.
In a statement published on the China Foreign Exchange Trade System’s website on Feb. 3, the regulator reinforced its intention to guide its currency alongside the basket, noting that “with the improvement of the market-oriented exchange rate regime, RMB exchange rate will continue referring to a basket of currencies and enhancing its flexibility,” it said.
Write to Anjani Trivedi at anjani.trivedi@wsj.com
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