According to those with knowledge of the situation, China instructed some brokerage firms to curtail proprietary trading in the foreign exchange market, signifying yet another effort by the government to support the under attack currency.
The sources’s Bank of China requested a reduction in currency proprietary desk trading from a number of brokers earlier this week, the sources said while declining to be identified discussing personal concerns because the request was confidential. Since then, the people claimed that several of these companies have nearly stopped trading themselves.
This furthers the other strategies the PBOC has employed to support the yuan, which had fallen to a 16-year low against the dollar, such as verbal warnings and tightening offshore funding costs. Due to the window guidelines and dwindling interest in competing with a central bank that is adamant about protecting the currency, trading volumes have decreased.
A fax submitted by Bloomberg requesting comments received no immediate response from the central bank.
According to Stephen Chiu, chief Asia FX and rates analyst at Bloomberg Intelligence, “The PBOC will have to keep liquidity loose and interest rates low to back the domestic economic recovery, rendering it hard to support onshore yuan via lifting funding cost” like in the offshore market. It will have to rely on direct spot sales through state-owned banks or other strategies, such as forgoing dollar purchases through window guidance.
This week, according to government data, the daily dollar-yuan spot onshore trade volume fell below $20 billion. After falling to its lowest level since 2007 in September, the onshore yuan has increased 1.2% this week to be trading at about $7.26 per dollar.
The latest move is just another effort by the PBOC to stop the yuan’s decline as it lowers interest rates, despite the fact that brokers deal less foreign exchange than banks. The authorities also raised Hong Kong’s bill sales plan earlier to restrict currency funding from abroad, which might limit short positions.
As it increases support for a faltering economy, the central bank said on Thursday that it will lower the reserve requirement ratio for the majority of banks. As China’s interest rate divergence grows from those of other major nations, the yuan has been falling.