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Since April, after bottoming and consolidating around 6.65 area, Chinese yuan has steadily declined around 4 percent against the USD and currently trading at 6.92 per USD. However, a ride higher would face some serious hurdles as China deemed it necessary to defend the psychological barrier of 7 per USD.
- Our calculations suggest that USD bulls are targeting a breach of 7 per USD level and reach 7.1 per USD. However, such a breach has become more difficult to pursue over the past weeks as PBoC has been signaling its determination to defend any major yuan depreciation. Even if such a breach takes place, t could only be temporary.
With trillions of dollars’ worth of reserves, the People’s Bank of China (PBoC) has ample ammunition to fend off any desired level for the USD/CNH exchange rate, however, PBoC’s concerns over the Yuan shorts show the intensity of selling pressure on the yuan.
At the beginning of the week, as the USD/CNH exchange rate neared 7 area, Guo Shuqing, head of China’s banking and insurance regulator warned that yuan shorts would inevitably suffer huge loss and added that the impact of U.S. tariffs on Chinese economy would be limited.
The PBoC usually follows through verbal intervention with actions. In January 2017, as the Yuan approached the psychological 7 areas, the central bank choked cash supply in Hong Kong and sent the currency’s deposit rates to record highs, which pushed USD/CNH lower.
