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SHANGHAI, Aug 27 (Reuters) - China’s yuan rebounded against the dollar on Tuesday after the central bank set a much stronger-than-expected midpoint, which markets took as an official attempt to prevent the Chinese currency from registering sharper losses.
Having faced mounting depreciation pressure since the trade war with the United States broke out last year, the yuan has lost nearly 3% against the dollar since Aug. 1, when U.S. President Donald Trump threatened to slash more tariffs on Chinese goods.
Prior to market opening, the People’s Bank of China (PBOC) lowered its official yuan midpoint to a fresh 11-1/2-year low, but at a stronger setting than traders had expected.
The PBOC set the midpoint rate at 7.0810 per dollar, 240 pips, or 0.34%, weaker than the previous fix of 7.0570 and the weakest since March 18, 2008.
The move in Tuesday’s official guidance rate was the biggest daily weakening in percentage terms since Aug. 7, but it was still 245 pips, or 0.35%, stronger than Reuters’ estimate of 7.1055 per dollar.
“Apparently, (the PBOC) intentionally lifted the yuan fixing to stabilise the market,” said a trader at a Chinese bank.
Many traders suspect the central bank might have actively used its counter-cyclical factor on Tuesday. The tool introduced into midpoint fixing formula in May 2017, is widely believed by the market as a method to reduce price swings and counteract depreciation expectations in the yuan.
The central bank was also believed to have heavily used the tool earlier this month as authorities sought to slow the currency’s decline after letting it breach the key 7 to the dollar level on Aug. 5.
Both onshore and offshore yuan bounced in early trade on Tuesday following the release of firmer-than-expected guidance rate.
The offshore yuan rebounded to a high of 7.1558 before trading at 7.1631 as of 0203 GMT. Its onshore counterpart, which starts trading at 0130 GMT, was 7.1514 as of 0203 GMT, up from the previous night close of 7.1520.
The spot rate is currently allowed to trade with a range 2 percent above or below the official fixing on any given day.
Carie Li, economist at OCBC Wing Hang Bank in Hong Kong said she had expected the central bank to hold the official yuan midpoint above the 7.1 per dollar level.
“The market will interpret this as an effort to stabilise the currency,” Li said.
“In the past they held the midpoint at 6.9, now they hold it at 7.10 ... It shows that they (PBOC) are still keen to manage the pace and scale of RMB depreciation,” she said, adding the yuan is likely to swing in a range of 7.1-7.2 per dollar before more trade war news.
Trump on Monday predicted a trade deal with China after positive gestures by Beijing, calming global markets that have been roiled by the latest salvoes in their tariff war. (Reporting by Winni Zhou and John Ruwitch in SHANGHAI, Noah Sin in HONG KONG; Editing by Simon Cameron-Moore)