PBOC signals caution on rapid yuan gain as it nears key 7 mark

The yuan slipped against the dollar after China's central bank sent a strong signal through its midpoint fixing, cautioning against a rapid appreciation of the currency which hovered just shy of the psychologically key 7-per-dollar level.

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Major state-owned banks were seen actively buying dollars in the onshore spot market and quickly recycling those dollars into the swap market, traders said. The combination of moves was also interpreted as an effort to slow the yuan’s gains.

Prior to market opening, the People’s Bank of China (PBOC) set the midpoint rate at 7.0358 per dollar, its strongest since September 2024 but 306 pips weaker than a Reuters’ estimate of 7.0052. The spot yuan is allowed to trade a maximum of 28 either side of the fixed midpoint each day.

The gap between the official midpoint and Reuters’ market-based estimate represented the largest weak-side deviation since data became available in 2022.

The pushback against fast appreciation came after the offshore yuan briefly rose past the key 7 level a day earlier, fueling market expectations that the onshore unit would follow suit and continue strengthening. The last time it was at the 7-per-dollar level was in May 2023.

“The recent yuan appreciation stemmed from short-term positive factors ... rather than signaling the start of a new appreciation cycle,” said Guan Tao, global chief economist at Bank of China International Securities and a former senior official at the State Administration of Foreign Exchange.