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China’s yuan surged this latest trading week to post its biggest-ever weekly gain as Beijing moved to head off the risk of capital flight and quash speculation, it was the biggest weekly gain since 2005. The sharp correction to the exchange rate comes as state-owned banks are aggressively selling dollars at the behest of the People’s Bank of China (PBOC), traders said according to a Reuters report released this week.
The yuan gained more than a full percentage point for the week, which was the sharpest rise since its revaluation in 2005, and a Reuters poll last Thursday showed that analysts have backed off from short positions in face of the central bank’s supporting firepower.
Senior Analyst Flemming Nielsen at Danske Bank in a recent report suggested a widening of the trading band in 2016 which would increase day to day volatility. He stated: “…the weak data so far in 2015 has increased upside risk on USD/CNY and we have revised our forecast higher. We expect the daily trading band to be widened further in early 2016 and the two-way volatility in the CNY exchange rate is poised to increase further”.
A firmer yuan may ease concerns that a further slide in the exchange rate could spark destabilizing capital outflows, and comes alongside other steps seen as tightening the capital account, including a recent announcement increasing restrictions on trading in gold.
Chen Yulu, an adviser to the People’s Bank of China (PBOC), told Reuters earlier in March that while China was not worried about capital outflows as such, it watching closely for signs of “capital flight.”
The yuan fell 2.4% against the dollar in 2014 on the back of a rising dollar and concerns about slowing economic growth, sparking a record $96 billion of capital outflows in 2014.
PBOC fighting speculators?
Traders saw the latest move as a repeat of a similar PBOC tactic in early 2014, when the central bank mustered major state-owned banks to drive speculators out of long-yuan positions.
“It is another case of the PBOC fighting speculators. What is different this time is that the central bank is now striking back at predictions of yuan depreciation, while until last year, it had battled against speculation of yuan appreciation,” said a senior trader at a European bank in Shanghai.
The yuan began falling in November (as you can see in the chart above) when the PBOC made a surprise interest rate cut in response to slowing growth, prompting companies to bail out of yuan on worries that increased liquidity injections would weaken the currency’s value.
The yuan is still around 2.5% below its all-time high of 6.04 per dollar struck in January 2014.
The PBOC did not answer attempts of Reuters for comment.