The yuan has depreciated sharply against the dollar over the past few weeks as the dollar strengthened and investors fretted about China's economic growth.
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The yuan hit its highest level in 16 months on Wednesday after Beijing unveiled a raft of stimulus measures on Tuesday to boost a slowing economy.
China's offshore yuan briefly strengthened to 6.9946 against the U.S. dollar, its highest level since May 2023.
Ben Emons, founder of Fed Watch Advisors, wrote in a note earlier on Wednesday that a rapid appreciation of the yuan could boost domestic stock markets, which would in turn further impact China's exports. deflationary pressures.
BNP Paribas expects expectations of more fiscal support, corporate hedging needs and improving risk appetite to limit USD/CNY trends.
“We believe China's weak growth and low inflation environment should put some pressure on the yuan going forward,” said Edmund Goh, abrdn's head of fixed income in China.
Unlike other major currencies such as the U.S. dollar and Japanese yen that implement floating exchange rates, China maintains strict control over the currency value of the RMB on the mainland. The RMB exchange rate trades within a limited range of 2% above or below the central parity rate of the day.
The renminbi is also traded outside the mainland, mainly in Hong Kong but also in London, Singapore and New York – this is known as the offshore renminbi, which is not as tightly controlled as the onshore renminbi and is affected by market supply and demand.
“We believe USD CNH is likely to fall below 7.0 over the next three months as policymakers’ pro-growth stance is likely to trigger more short covering of CNH bearish positions and the scale of the Fed’s easing policy exceeds China's central bank,” Zerlina Zeng, Asia credit strategist at credit research firm CreditSights, wrote in a note.
In a rare high-level press conference on Tuesday, People's Bank of China Governor Pan Gongsheng announced that the central bank would cut the amount of cash required by banks, known as the deposit reserve ratio, or RRR, by 50%. He also said that the central bank will lower the 7-day repurchase rate by 0.2 percentage points.
Emmons said the monetary transmission pipeline on bank balance sheets was “clogged” by the housing glut, which had led to a “crisis” in consumer confidence.
Chinese government bonds rose after the People's Bank of China's announcement, with 10-year and 30-year bond yields hitting record lows. Higher demand for a country's bonds tends to cause that country's currency to strengthen.
On Wednesday, the 10-year Treasury yield rose 5 basis points to 2.074%, and the 30-year Treasury yield edged up to 2.182%.
Chinese stocks also rallied yesterday following the news, with Hong Kong's Hang Seng posting its best one-day gain in seven months and mainland China's CSI 300 notching its biggest one-day gain in more than four years.
—CNBC’s Evelyn Cheng contributed to this article.