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SHANGHAI –China‘s central bank on Monday announced fresh steps to slow the pace of the yuan‘s recent depreciation by making it more expensive to bet against the currency, as global policymakers grappled with the economic effects of a broad dollar rally.
The People’s Bank of China (PBOC) said it would raise the foreign exchange risk reserves for financial institutions when purchasing FX through currency forwards to 20 percent from the current zero, starting on Sept. 28, to “stabilize FX market expectations and strengthen macro prudential management.”
The move to resume FX risk reserves would effectively raise the cost of shorting the yuan at a time the local currency is facing renewed depreciation pressure, traders and analysts said. They estimate the cost of forward dollar buying could be raised by 500 to 700 pips.
“So, the effect of the policy move may be more powerful than verbal guidance and signal through midpoint fixing settings,” said a trader at a foreign bank.
Spot yuan hardly budged on the announcement. The onshore yuan traded at 7.1662 per dollar, versus the previous late night close of 7.
