Offshore Yuan Slips on Soft PBOC Fixing

The offshore yuan weakened to around 6.74 per dollar on Thursday, reversing gains from the previous session as a weaker-than-expected daily fixing by the People's Bank of China weighed on the currency. The central bank set the midpoint rate at 6.7888 per dollar, 418 pips weaker than a Reuters estimate. While seasonal factors as September approaches could support the yuan, the extent of any gains will likely depend on the PBOC's fixing strategy. The yuan's decline was partly cushioned by a softer US dollar after inflation data reduced expectations of an imminent Federal Reserve rate hike. Meanwhile, the PBOC reiterated its commitment to rolling out targeted policy support while avoiding broad-based easing in its quarterly monetary policy report. Separately, the PBOC conducted no seven-day reverse repos for a third consecutive day on Thursday, while announcing plans to inject up to CNY 600 billion per day through overnight reverse repos on August 14 and August 17–19.

The offshore yuan held its decline around 6.74 per dollar on Wednesday, as softer inflation data underscored persistent weakness in domestic demand. Annual consumer inflation eased to a six-month low of 0.5% in July, reflecting declines in food prices and slower growth in non-food costs. Producer prices also moderated to 3.5% from 4.1%, marking the first slowdown since returning to positive territory in March amid an oil-price surge triggered by Middle East tensions. Meanwhile, the Political Bureau of the Communist Party of China Central Committee recently pledged more proactive and effective macroeconomic policies, including the faster deployment of fiscal funds and bond proceeds, while continuing to support large-scale equipment upgrades and consumer goods trade-in programs. On the monetary policy front, the central bank conducted no seven-day reverse repos on Tuesday, marking the first time since June that it had refrained from injecting liquidity through the short-term policy tool.

The offshore yuan held firm around 6.74 per dollar on Friday, remaining at its strongest level since early February 2023, as Beijing's efforts to accelerate the yuan's internationalization continued to bolster the currency. Chinese banks have expanded direct yuan settlement and clearing services to about a dozen additional currencies, including the Thai baht, Brazilian real, and Kazakhstani tenge, helping reduce reliance on the US dollar and supporting Beijing's push to strengthen the yuan's global role. The yuan also drew support from robust trade data, which showed that although export and import growth moderated in July, both remained strong amid solid demand for AI-related technology products. The latest data came after Beijing recently unveiled fresh retaliatory measures against Washington, including tighter controls on drone and related technology exports, sanctions on seven US firms, and its first national security investigation tied to foreign trade.