Yuan slips to two-week low after PBOC acts to curb gains

The central bank's actions signal a limit on how quickly it will allow the yuan to appreciate, potentially capping near-term gains against the dollar and the trade-weighted basket. A softer yuan could modestly weigh on regional currencies that track it, such as the Australian dollar and South Korean won, especially with risk sentiment already fragile due to the US midterms and the Gulf situation. The move eases pressure on Chinese exporters, which supports broader efforts to stabilize growth and equities alongside this week's buyback lending measures. The central bank has indicated that further tools are available, so traders may be cautious about betting heavily on renewed yuan strength.

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Authorities in Beijing have decided the yuan has risen enough for now, conveying this through a rule change and the daily fixing.

Key points:

• The onshore yuan weakened to around 6.68 per dollar, its lowest since 19 October, while the offshore yuan fell roughly 0.1%
• On Tuesday, the PBOC raised the foreign exchange reserve requirement ratio to 6% from 4%
• The action is seen as one of the strongest efforts to slow a yuan rally of about 5% this year
• The PBOC set Wednesday's fixing near 6.72, much weaker than the roughly 6.68 anticipated
• The CFETS trade-weighted index eased from a 52-month high but is still up about 5.9% this year

The Chinese currency dropped to its weakest level in more than two weeks against the dollar on Wednesday, according to Reuters. The central bank's daily fixing came in significantly weaker than expected, and investors were assessing its decision to raise banks' foreign exchange reserve requirements.

In morning trade, the onshore yuan weakened to about 6.68 per dollar, its softest since 19 October, while the offshore yuan slipped roughly 0.1% to a similar level.

The step followed the People's Bank of China's Tuesday announcement that it would increase the foreign exchange reserve requirement ratio by 2 percentage points, from 4% to 6%. This ratio determines how much of banks' foreign currency deposits must be held in reserve rather than lent or traded. Raising it reduces the supply of dollars in the onshore market, which tends to support the dollar against the yuan. Traders and analysts regard this as one of the most forceful attempts yet to slow the yuan's rally, which has lifted the currency about 5% against the dollar this year.

A strategist at a European bank told Reuters the central bank was effectively putting the brakes on a surging currency. She said strong Chinese trade was keeping the yuan firm, and that Beijing had ample room to intervene again if the currency's trade-weighted value kept climbing.

The PBOC reinforced its message on Wednesday through the daily midpoint fixing. It set the midpoint at around 6.72 per dollar, its weakest since 23 October and well below the roughly 6.68 that markets had anticipated. The spot yuan can trade up to 2% on either side of that midpoint each day. Market watchers noted that the central bank has been guiding the yuan gradually higher this year, but at a slower pace than markets predicted, in an effort to manage the pace of appreciation.

Based on Wednesday's fixing, the CFETS index, which tracks the yuan against a basket of trading partners' currencies, eased to around 103.8. That was down from a 52-month high on Tuesday, but still up about 5.9% this year, according to Reuters calculations.

The intervention signals that Beijing is wary of a currency strong enough to hurt exporters, at a time when the economy is already grappling with weak domestic demand and falling prices.