Yuan hits fresh 3-1/2-year high despite PBOC's weak guidance

China's yuan hit a fresh 3-1/2-year high against the dollar on Monday, despite the People's Bank of China issuing a weak-side guidance that was the most pessimistic since February 2023. The spot rate strengthened to 6.7050 per dollar in early trading, before retracting to 6.7125. The offshore yuan rate was at 6.7113 yuan per dollar, marking a 0.05% decrease in Asian trade.

Prior to market open, the central bank set the midpoint rate at 6.7795 per dollar, which was 709 pips lower than a Reuters estimate. The Chinese central bank has been incrementally improving its daily yuan guidance, but at rates below market expectations, indicating a deliberate management of the currency's appreciation, according to traders and analysts.

The yuan is permitted to trade within a 2% range either side of the fixed midpoint each day. Geoff Yu, a senior EMEA market strategist at BNY, noted that the renminbi remains one of the region's most resilient currencies, but its strength is attracting more official scrutiny, as evidenced by the widening counter-cyclical factor in daily USD/CNY fixings.

Chinese banks have been raising dollar deposit rates and purchasing U.S. Treasuries in recent months, actions that could potentially slow the yuan's gains, occurring amid a surge in U.S. yields, as reported by Reuters. The dollar's six-currency index remained unchanged at 99.17, as traders awaited the upcoming inflation report for further insights into the Federal Reserve's rate policy following a robust non-farm payroll report on Friday.

Orient Securities analysts stated that the labor market rebound has heightened expectations of a September Fed rate hike, but the forthcoming August CPI report will likely determine whether such a move occurs.