(Bloomberg) -- Doubts over US exceptionalism are giving China a much needed break from strongly defending its currency, as the yuan’s strength allows it to dial back support via its daily reference rate.
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The gap between the People’s Bank of China’s daily reference rate versus narrowed to 675 pips on Monday, the least since early December. While the so-called fixing remains near the strongest level since November, its smaller spread with estimates signals weakening official support for the currency.
The fixing-estimate gap had widened more than 1,500 pips in January, the most in nine months, as concern over China’s economy and tariffs dragged the currency to its weakest since 2023. Now the urgency for the PBOC to boost the currency has receded, with the yuan hovering near a four-month high as the dollar swoons on concern that President Donald Trump’s chaotic tariff rollout would put the US economy on track for a recession.
The narrower fixing-estimate gap “shows that there is moderating yuan depreciation pressure,” said Ken Cheung, chief Asia FX strategist at Mizuho Bank Ltd. And the dollar is “the more important driver behind the actions.”
The PBOC has capped the yuan’s drop this year through its daily reference rate, which limits moves in the onshore yuan by 2% on either side. It also sidestepped analyst calls for weakening the currency to counter the impact of US tariffs. The fixing limits moves in the onshore yuan by 2% on either side.
The central bank has also delayed interest-rate cuts, paused bond purchases so far this year and tolerated a funding squeeze among financial institutions to prevent further yuan declines and capital outflows. Uncertainties over Trump’s tariff plans means the PBOC is expected to retain its currency support to some extent.
“The PBOC is expected to keep setting the daily fixing at sub-7.2000 levels, since there is still uncertainty over Trump’s tariff policies and the Federal Reserve’s rate cut path,” said Carie Li, global market strategist at DBS Bank Ltd in Hong Kong.
That view is echoed by Mizuho’s Cheung. “While the dollar’s decline gives the PBOC a sigh of relief, the PBOC is likely to keep the FX support and room for yuan appreciation will remain limited,” he said.