PBOC - Major state-owned banks in China were seen selling dollars in the offshore foreign exchange market on Tuesday, according to four sources familiar with the matter. This action suggests that authorities are trying to slow the recent depreciation of the yuan.

The dollar selling by state banks occurred as the yuan in offshore markets weakened and approached a significant psychological level of 7.25 per dollar, as reported by two sources.

One source noted that the 7.25 level remains a key threshold. They added that if this level is breached, the yuan could quickly reach its lowest point last seen in 2022.

In November, the onshore yuan dropped to a low of 7.3280 per dollar, a level last seen during the global financial crisis in 2008. Meanwhile, the offshore yuan hit a record low of 7.3746.

State-owned banks typically act on behalf of the central bank in the foreign exchange market. However, they can also trade for their own accounts or their clients.

To bolster its defense, the People's Bank of China (PBOC) set the daily yuan fixing stronger than market expectations for two consecutive days on Tuesday. This sparked speculation that authorities were becoming less tolerant of the currency's depreciation.

Some currency traders also noted that they observed state banks selling dollars on Monday, just before the close of domestic markets (08:30 GMT), in an attempt to support the closing yuan price. This is because the closing rate can influence the official guidance rate for the following day.

"Trading desks reported strong sales in cross-tenor swaps before market trading, which is likely an effort to sterilize the spot intervention that has occurred in recent sessions," UBS noted in their report. They referred to buying and selling in the forward market to obtain the US dollars needed by the large banks in spot transactions to maintain the yuan’s value.

The significant depreciation of the yuan has been triggered by China's fragile post-pandemic economic recovery and an increasing yield differential with the United States, as the Federal Reserve continues to raise interest rates. So far this year, the yuan has fallen more than 4% against the US dollar.

In a market where most non-dollar currencies are weakening in response to the strength of the greenback, the yuan’s value against its main trading partners also dropped to a one-week low of 96.54 on Tuesday. According to calculations by Reuters based on official data, this decline has caused the yuan's annual loss against a basket of major currencies to reach 2.16%.

Warning!

This analysis is based on fundamental and technical perspectives from trusted sources. Please note that it is not intended as advice or recommendation. Always remember that the content is meant to enrich the reader's information. Make sure to conduct your own research first regarding other forex information to be used as a reference in your trading.

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