- The PBOC set its midpoint at 6.7852, which was 633 pips (or 0.0633 yuan) weaker than the Reuters projection of 6.7219, marking the most significant weak-side gap since February 27.
- The USD/CNY closed close to 6.72 as the yuan touched its highest point since February 2023, and later slipped to 6.7168, indicating the yuan strengthened against the dollar.
- The fixing is significant because onshore USD/CNY trading is restricted to a 2% range above or below the central reference rate, and on Tuesday the spot rate stood around 1.0% firmer than the midpoint, which can elevate intervention risk.
- A 6.11% currency gain would result in about 6.5% more dollars for the same profit earned in yuan before hedging, and a business posting 1 billion yuan in earnings would yield a larger dollar value purely due to exchange rates.
- A stronger yuan makes Chinese exports costlier for overseas buyers and squeezes profit margins for exporters who bill in dollars but pay costs in yuan.
- The KraneShares CSI China Internet ETF ended the session at $26.41, gaining 0.61%, with 14.1 million shares traded, and added 0.11% to reach $26.44 after the close; it reported $5.30 billion in assets and 34 holdings.
The Chinese yuan retreated from a 3½-year peak on Tuesday after the People's Bank of China (PBOC) set its daily midpoint at 6.7852, which was 633 pips below market expectations. This gap is the largest weak-side gap since February 27.
The yuan's decline follows a period of significant appreciation, with the currency up approximately 4% this year and 6.11% over the past 12 months. The USD/CNY closed near 6.72, indicating a strong performance against the dollar, but the PBOC's intervention aims to curb further gains.
The fixing is crucial as onshore USD/CNY trading is limited to a 2% range above or below the central reference rate. On Tuesday, the spot rate was about 1.0% firmer than the midpoint, raising concerns about potential intervention if traders push the yuan closer to the strong limit of the band.
As the yuan strengthens, Chinese exports become more expensive for foreign buyers, potentially squeezing profit margins for exporters who bill in dollars while covering costs in yuan. For instance, a business with 1 billion yuan in earnings would see a larger dollar value due to the 6.11% currency gain before any hedging is applied.
The KraneShares CSI China Internet ETF ended the session at $26.41, gaining 0.61%, with 14.1 million shares traded, reflecting investor interest amid currency fluctuations.
“The fixing is significant because onshore USD/CNY trading is capped at 2% around the midpoint, and Tuesday's spot rate stood 1.0% firmer, elevating intervention risk. A stronger yuan also makes Chinese exports costlier and squeezes dollar-billing exporters' margins.”
