PBOC sets USD/ CNY reference rate for today at 6.8467 (vs. estimate at 6.7988)
The desk views the PBOC's recent adjustment of the USD/CNY reference rate as a significant signal of its ongoing monetary policy stance amid a complex geopolitical backdrop. Per the full note source, the reference rate was set at 6.8467, notably above market expectations of 6.7988, indicating a potential shift in the central bank's approach to managing currency fluctuations. This comes alongside a liquidity injection of 500 million yuan via reverse repos, maintaining the interest rate at 1.4%, which suggests the PBOC is balancing economic support with currency stability. The upcoming state visit by U.S. President Donald Trump may further complicate these dynamics, as trade relations remain a critical factor in currency valuation.
What the desk is arguing
The desk posits that the PBOC's decision to set the USD/CNY reference rate higher than anticipated underscores a cautious approach to currency management. This move, alongside the liquidity injection, reflects the central bank's intent to stabilize the yuan while navigating external pressures.
The reference rate's deviation from market estimates by nearly 480 pips suggests a deliberate strategy by the PBOC to influence market sentiment and manage expectations. The liquidity measures taken today further indicate the central bank's commitment to ensuring sufficient market liquidity while maintaining control over the yuan's valuation.
Where it sits in our coverage
Our consensus target for USD/CNY is 1.075, with a range from 1.04 to 1.12. Specific firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) - citi: 1.12 (Mar26)
This view aligns with jpmorgan's target, which is at the upper end of our consensus range, suggesting a bullish outlook on the yuan's depreciation against the dollar in the medium term. The desk's interpretation of the PBOC's actions supports this positioning, reinforcing the expectation of further yuan weakness if external pressures persist.
How other firms see it
Firms like citi and jpmorgan are aligned in their outlook, anticipating a weaker yuan trajectory, while bofa presents a contrary view, expecting a more stable yuan performance. This divergence highlights differing assessments of the PBOC's effectiveness in managing currency fluctuations amid external pressures.
Key related currency pairs to monitor include EUR/USD, which may reflect broader trends in global risk sentiment, and AUD/CNY, as commodity prices and trade relations with China will influence the yuan's performance.
What the calendar says
With no upcoming events scheduled, the focus will remain on the implications of the PBOC's recent actions and the potential impact of the U.S. President's visit to China on trade relations and currency dynamics.
The PBOC allows the yuan to fluctuate within a +/- 2% range, around this reference rate. Injects 500mn yuan via 7-day reverse repos in open market operates today. Unchanged rate of 1.4%.
Confirmation from China, says U.S. President Donald Trump will pay a state visit to China from May 13–15 at the invitation of President Xi Jinping. This article was written by Eamonn Sheridan at investinglive.com.
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