Why China's Central Bank May Find It Easier To Defend Yuan In Coming Weeks And Ease Currency Woes

The offshore yuan’s rally is set to push the onshore unit after trade resumes following China's Golden Week holidays next week. This is expected to ease pressure on the central bank to defend the currency, according to Bloomberg.

What Happened: Offshore yuan, which was trading near the 7.14 mark against the dollar on Sept. 30, has risen to the 7.048 level as of Thursday. However, mainland China markets have been closed this week on account of the Golden Week holidays because of which the onshore unit is expected to surge when it opens for trading.

See Also: Understanding A Currency Peg

As traders consider the possibility of the U.S. Fed winding down its hawkish tone going ahead and the one-way dollar rally comes to a halt, the People’s Bank of China could likely see some pressure ease in terms of defending the onshore yuan against the greenback. However, the country’s easy monetary policy stance coupled with the rising risk of deflation could prove challenging, the Bloomberg report said.

Expert Take: Khoon Goh, head of Asia research at Australia & New Zealand Banking Group in Singapore, told Bloomberg the offshore yuan’s strength is largely driven by the pullback in the dollar.

“The yuan will remain under pressure this year as the dollar dominance is set to continue,” he added.

Why It's Important: After the onshore yuan fell to its lowest level since 2008 last week and the offshore unit depreciated to the weakest in data going back to 2010, the PBoC announced a string of stronger-than-expected yuan fixings to stem the losses. The central bank also announced a risk reserve requirement of 20% on currency forward sales by banks that made it more expensive to short the yuan, the report said.

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