Once again, the overnight session was all about China.
Shortly after the PBOC fixed the Yuan weaker by 340 pips to 6.6497, the weakest since August 25, 2017, a wave of selling hit the Chinese currency, sending the yuan past 6.7 to the dollar for the first time in a year, with the offshore CNH dropping as low as 6.7332, at which point the verbal interventions began.
Shortly after the rout sent the Yuan plunging, PBOC deputy governor and SAFE head, Pan Gongsheng, said that China has ample foreign reserves and many foreign exchange tools. He also said that Chinese policymakers are "confident" that the yuan can be kept basically steady, and that the PBOC has "rich experience and plenty of policy tools" to keep the currency stable.
His commentary however was not sufficient and he was followed by PBOC Governor Yi Gang himself, who using standard language to describe Beijing's stance on the currency said China will "keep the yuan exchange rate basically stable at reasonable and balanced level." According to Bloomberg, the two sets of comments were the first clear statement on the currency from the authorities since the yuan started weakening in mid-June.
"Recently the foreign exchange market has shown some volatility and we’re paying close attention to that," Yi said in a statement posted on the central bank’s website, which was a response to questions from the China Securities Journal. He added that the fluctuation is "mainly due to factors such as a stronger dollar and external uncertainties, and there’s been some pro-cyclical behavior." Said otherwise: don't blame us.
Like Pan, Yi said that "China’s economic fundamentals are sound and financial risks are controllable" adding that the nation must stick with its foreign-exchange policy of "managing a floating currency exchange rate mechanism, which is based on market supply and demand and with reference to the basket of currencies." The central bank will maintain a prudent, neutral policy stance, he assured markets.
In other words, the PBOC made it clear that the recent collapse in the Yuan was due to market forces, and not as a result of central bank intervention, a stance which would have very negative repercussions just days before the US is set to launch tariffs on $34BN worth of Chinese imports.
More importantly, Pan and Yi succeeded in arresting the Yuan's collapse, which staged a dramatic turnaround, as the CNH rose by nearly 800 pips in the span of 4 hours, and the USDCNH dropped from a session high above 6.733 to just above 6.65. A failure to contain the tumble would have fed speculation that officials are effectively depreciating the currency to defend against the effects of trade tariffs.
While there were no clearly visible, heavy-handed actions in the market, there were some signs of mild, suspected intervention during morning trading on Tuesday. Some major Chinese banks sold the dollar...