Recently, the onshore Chinese yuan has been approaching the lower limit of a 2% volatility range frequently, with analysts warning not to underestimate the risk of the Chinese authorities expanding the volatility policy.
The continuous weakening of the midpoint of the yuan exchange rate has made the current 2% volatility range a significant barrier to prevent the currency from falling. The yuan exchange rate is not freely floating but is determined by the authorities setting the midpoint, along with a 2% fluctuation range.
Trang Thuy Le, an Asian currency strategist at Macquarie Group Ltd., said in an interview with Bloomberg that as the yuan continues to test the lower limit of the daily 2% volatility, the People’s Bank of China may consider expanding the trading range limit within this year.
Since Tuesday this week, the daily rate of midpoint adjustment has increased to over 20 points, while the onshore yuan continues to trade near the lower limit of the 2% range calculated from the midpoint, affecting some spot and forward transactions.
Le mentioned that the potential expansion of the daily trading range limit for the yuan by the People’s Bank of China might be a risk in the market that has not been given enough attention.
She stated that there is a pressing need for the yuan to depreciate rapidly as well as to stabilize the midpoint.
She explained that expanding the volatility range before the fourth quarter can achieve two goals: first, quickly weaken the yuan while keeping the midpoint stable to signal a halt; second, send a strong message to the market to prepare for bigger exchange rate fluctuations and depreciation risks before the US election.
The last time Beijing adjusted the intraday volatility range of the yuan against the US dollar was ten years ago, expanding the range from 1% to 2%.
Le also forecasts that the onshore yuan to US dollar exchange rate will drop to 7.33 in the third quarter, while the offshore yuan to US dollar exchange rate will fall to 7.35.