PBOC fixing below 6.80 pushes yuan to 3-year high amid policy shift

The People's Bank of China set its daily yuan fixing below 6.80 for a second consecutive session on Tuesday, pushing USD/CNY to 6.77 and reinforcing a policy bias toward gradual currency appreciation.

"China has proven to be more resilient than expected to the developments of the Gulf War, and the PBOC is comfortable with allowing the yuan to strengthen further against the US dollar," Maybank analysts said in a note.

The PBOC set the USD/CNY central parity rate at 6.7972 on Tuesday, following Monday's fixing of 6.7989 — the first official midpoint below 6.80 since February 2023. The onshore yuan traded at 6.7820 at midday, while the offshore counterpart fetched 6.7833. The yuan has strengthened 3 percent against the dollar so far this year, slightly trailing the Australian dollar's 3.85 percent gain over the same period.

A stronger yuan reduces imported inflation and supports capital inflows into Chinese financial markets, but it also pressures exporters who face shrinking margins on overseas sales. With Q2 GDP data due Wednesday and US inflation figures expected later this week, the next directional move in USD/CNY hinges on whether the PBOC maintains its current fixing trajectory and how the Federal Reserve responds to price pressures.

How the PBOC Is Managing the Yuan's Rise

The central bank has deployed a combination of tools to manage the pace of appreciation without triggering excessive volatility. Alongside the stronger daily fixings, the PBOC injected 224 billion yuan through seven-day reverse repurchase agreements on Tuesday while keeping the policy rate unchanged at 1.40 percent. The liquidity injection maintains stable funding conditions across China's banking system without signaling a broader shift in monetary policy.

The PBOC has also quietly instructed select banks to stop re-discounting commercial bills below a 0.5 percent interest rate, according to a mid-July directive. The floor on re-discount rates complements the broader easing cycle — the central bank cut the one-year relending rate from 1.5 percent to 1.25 percent in January — by ensuring that cheaper credit does not spiral into a race to zero.

The last time the PBOC sustained fixings below 6.80 was in early 2023, when the yuan strengthened to around 6.70 before reversing course as China's post-Covid recovery faltered. This time, the policy backdrop differs: exports surged in June on AI-driven demand for chips and data center computing power, giving policymakers a buffer to tolerate a firmer exchange rate. The trade surplus provides cover for yuan appreciation that would otherwise draw complaints from export lobbies.

What Investors Are Watching Next

Market participants are focused on three catalysts that could determine whether USD/CNY breaks below 6.75 or rebounds toward 6.80. The first is China's Q2 GDP print on Wednesday, which will test whether the economic recovery is gaining traction after the Caixin manufacturing PMI edged into expansion territory in June. The second is US June CPI data due later Tuesday, followed by the PPI release and Federal Reserve Chair Kevin Warsh's semiannual congressional testimony — any hawkish surprise could strengthen the dollar and slow the yuan's advance.

The third factor is the PBOC's own tolerance threshold. The gap between the official fixing and market estimates has narrowed sharply from a high of 544 pips in mid-June to just 63 pips on Tuesday, suggesting the central bank is easing its grip as the yuan's appreciation pace moderates. If the fixing continues to track market projections, traders will interpret that as a green light for further yuan gains.

For global investors, the stakes are clear: a sustained yuan appreciation cycle would reshape trade flows across Asia, boost the relative appeal of Chinese bonds and equities, and accelerate the renminbi's internationalization push. The PBOC's Lujiazui Forum announcements in June — including plans to open repurchase facilities and offshore trading to foreign central banks — underscore Beijing's ambition to position Shanghai as a financial superpower and the yuan as a genuine alternative to the dollar in global settlements.

This article is for informational purposes only and does not constitute investment advice.