China’s support for the yuan on Friday signalled its desire to manage its decline, as broad strength in the US dollar kept the currency close to a policy no-go area.

The People’s Bank of China (PBOC) set its daily reference rate for the managed currency at 7.1196 per dollar. While the level was slightly weaker than Thursday’s, the difference between the so-called fixing and forecasts was the widest since April.

China sets the so-called fixing at 9.15am local time, around which the currency is then permitted to trade in a 2% range. 

Chinese state-owned banks also increased support for the currency. They sold dollars in the onshore market when the yuan edged lower to around 7.2605, according to traders who asked not to be identified as they were not allowed to speak publicly.

The yuan has fallen to its lowest since November, and is close to the weak end of its trading band, amid broad dollar strength and pessimism about prospects for the Chinese economy. While Beijing has been allowing the currency to gradually decline, it is wary of triggering a vicious cycle of capital outflows and further losses, and favours stability over rapid declines.

“The PBOC is trying to hold the pricing power in its own hands,” said Le Xia, an economist at BBVA. “The PBOC is smoothing the overall process of weakening the yuan and deterring markets from betting against it.” The central bank’s guidance is aimed at preventing one-way weakness, he said.

The onshore yuan was little changed at 7.2607 per dollar, while its offshore peer gained 0.1% to 7.2860. 

The PBOC’s actions comes amid broad dollar strength, with Bloomberg’s index of the US currency close to its highest this year driven by the US Federal Reserve’s higher-for-longer interest rates. 

The yuan’s weakness is symptomatic of deteriorating sentiment towards the world’s second-largest economy, which is also seeing a bond market rally as investors seek out haven assets. Benchmark yields have tumbled towards record lows amid mixed economic data and expectations of further stimulus.

PBOC governor Pan Gongsheng said on Wednesday the momentum of the dollar is weakening, and that will help keep the yuan stable and expand room for China’s monetary policy.

“The PBOC is sending a signal that they want to continue its strong control over the yuan, and prevent a steeper decline or speculative pressure from building against the yuan,” said Fiona Lim, a senior currency strategist at Malayan Banking Bhd (Maybank).

  - Bloomberg