China's state banks swapping and selling USD for Yuan
Major Chinese state-owned banks have been trading Yuan for US Dollars (USD) in the onshore swap market and selling those Dollars in spot currency markets this week, as per Reuters. Over the past week, the Yuan has appreciated by 2%, reaching around 7.13 to the USD, its highest level in almost four months. Typically, state banks sell USD when the Yuan is facing depreciation pressure, making the timing of this move rather unusual.
Dollar weakness and Yuan gains
This activity by state banks coincides with a general weakening of the USD. The Dollar index has fallen more than 3% in November due to US yields reacting to indications of a peak in Federal Reserve monetary tightening. Market observers speculate that banks may be attempting to accelerate Yuan's appreciation and motivate exporters to convert a larger portion of their forex earnings into Yuan. Despite its recent gains, the Chinese currency remains over 3% lower against the dollar this year.
PBOC lowers USD-Yuan daily fixing rate
The People's Bank of China (PBOC) has also been reducing the USD-Yuan daily fixing rate this week, setting the midpoint at a 3-1/2-month low of 7.1406 per Dollar on Tuesday. "It is surprising to see they keep lowering the fixing at this rate. To me, it looks like they are doing preparatory work ahead of a policy rate cut," said Kiyong Seong, Lead Asia Macro Strategist at Societe Generale.