Yuan price hits 16-month high

On the afternoon of September 20, the yuan in Shanghai reached 7.04 CNY per USD – the highest level since May 2023. This currency is heading for its 6th consecutive increase. The current exchange rate is 7.05 CNY per USD.

At today’s meeting, the People’s Bank of China (PBOC) decided to keep its benchmark lending rate unchanged at 3.35% instead of cutting it as the market had expected. However, observers still expect Beijing to launch more economic support policies. This expectation has helped the yuan appreciate.

The US Federal Reserve’s interest rate cut on September 18 has given China more room to ease policy without putting pressure on the yuan. Since late July, the yuan has risen 3%, partly offsetting the decline in the first half of the year. The main reason is the recent weakening of the USD in anticipation of a Fed rate cut.

“I still expect the PBOC to cut interest rates in the coming months. This is necessary to remove deflationary pressure in the economy,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management.

A rate cut could weaken the yuan. But many believe the PBOC will not act as aggressively as the Fed. And the negative impact could be offset if China’s economy grows faster thanks to stimulus policies.

Chinese state-owned banks increased their purchases of U.S. dollars on the domestic market on Tuesday to prevent the yuan from rising rapidly. Yang Fan, a macro analyst at Citic Securities, said the exchange rate would be unlikely to fall below 7 yuan per dollar as the PBOC wants to maintain stability.

This morning, the agency set the daily reference rate at 7.0644 CNY per USD – a 16-month high. The yuan is only allowed to fluctuate within a 2% band around the reference rate.