The People’s Bank of China intervened after the yuan hit a 16-year high against the dollar

The People’s Bank of China set the yuan’s onshore midpoint of 7.2006 per dollar on Friday – more than 1,000 basis points stronger than the Reuters estimate of 7.3065 per dollar.

This is the second day in a row that the fixing rate was above 1,000 basis points stronger than the Reuters forecast, and it concludes four consecutive days that the midpoint rate was nearly 900 basis points stronger than forecasts.

The previous day, the Chinese central bank set the midpoint at 7.2046, against a Reuters estimate of 7.3047.

The midpoint of the yuan is a reference point for trading, and it ranges between +2% and -2%. This means that the yuan, also referred to locally as the renminbi (RMB), is allowed to trade 2% above or below the fixing rate each trading day.

Friday’s move comes after the local yuan fell to a 16-year low against the dollar on Wednesday, trading at 7.2981.

The internal yuan strengthened 0.1% against the dollar at 7.2836 on Friday, and the external yuan eased slightly to 7.3057.

The internal yuan is traded on the mainland and is referred to as the Chinese yuan, while the external yuan – which is traded in markets such as Hong Kong and Singapore – is referred to as the CNH.

Vishnu Varathan, head of economics and strategy for Asia and Oceania at Mizuho Bank, wrote in a note that intervention risks for the local yuan are heightened by “China’s faltering growth and financial risks undermining the stability of the Chinese yuan.”

In the medium term, the local yuan may face headwinds, he said, adding that “charged geopolitical factors amid economic gloom and financial risks may permanently impact the Chinese yuan.”

Reuters reported Thursday, Citing people with direct knowledge of the matter, Chinese state banks were seen selling US dollars to buy yuan in the domestic and offshore foreign exchange markets this week. Doing so will usually slow down the yuan’s depreciation.

The central bank said on Thursday the second quarter Monetary Policy Implementation Report It will “maintain reasonable and sufficient liquidity,” and maintain its “careful and robust” policy to support the country’s economic recovery.

Regarding the exchange rate, the People’s Bank of China noted in the report that foreign exchange settlement and RMB sales were “reasonable and orderly”, and market expectations were “stable”.

It pledged to “maintain the fundamental stability of the RMB exchange rate at a reasonable and balanced level, and resolutely prevent the risk of overshooting the exchange rate.”

China maintains tight control over the internal yuan, pegging it with a so-called daily midpoint fix for the dollar based on the previous day’s closing level for the yuan and quotes taken from interbank dealers.

It is unlike other major currencies such as the US dollar or the Japanese yen, which have a free floating exchange rate.

The internal yuan is allowed to trade within a narrow range above or below the mid-point rate of the day. If it deviates too much, according to some market watchers, China’s central bank will step in to buy or sell the currency, putting a cap on its daily fluctuations.