China and Japan push back against dollar strength

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Officials in China and Japan are pushing back against the strength of the US dollar as a rally by the greenback threatens to drive both the renminbi and the yen to historic lows.

The People’s Bank of China set the trading band for the Chinese currency against the dollar at an unexpectedly high level on Wednesday, in the latest sign of growing discomfort among top leaders over the renminbi’s depreciation.

Separately, Japan’s top currency diplomat issued his sharpest warning yet against the yen’s fall, to prevent selling momentum building.

“It encourages speculators if they don’t intervene and before you know it dollar yen will be at 160,” said Chris Turner, head of forex strategy at ING.

Asia’s two largest economies have benefited from weaker currencies, which have boosted both countries’ exports. The renminbi has fallen 5.6 per cent against the dollar this year, while the yen has dropped 11 per cent to more than ¥147, as the greenback is pushed higher by robust US economic data.

But top officials in both Tokyo and Beijing are wary of runaway depreciation against the ascendant dollar.

The move by the PBoC centred on the currency’s trading band, the midpoint for which is set every morning by the central bank. The currency is only permitted to trade 2 per cent in either direction from it. On Wednesday, it set the midpoint at Rmb7.1969. That was both 0.11 percentage points stronger than a consensus forecast from analysts polled by Bloomberg and a record gap.

The renminbi finished onshore trading in China on Wednesday at Rmb7.31, close to the lows seen last October when cities across the country were locked down in response to Covid-19 outbreaks.

Analysts said the move reflected Chinese leaders’ concerns about the potential for capital flight if the currency lost too much ground too quickly.

The gap between yields on US Treasuries and renminbi-denominated Chinese government bonds has widened in recent weeks, threatening to drive further outflows from China’s onshore debt market. At the same time foreign investors have been selling Chinese equities.

“China is very concerned with foreign exchange stability right now, especially after outflows from the stock market in August,” said Ken Cheung, chief Asia foreign exchange strategist at Mizuho Bank.

Foreign investors sold a record $12bn of Chinese stocks last month as the latest stimulus measures from Beijing failed to address concerns over slowing economic growth and a liquidity crisis in the country’s real estate sector.

“If the PBoC can preserve foreign exchange stability they gain more room for monetary policy easing, which is quite important for supporting the real economy right now,” Cheung said.

In Japan on Wednesday, Masato Kanda, vice minister of finance for international affairs, told reporters of the yen that “if these moves continue, the government will respond appropriately without ruling out any options.”

Japan’s yield differential with the US is even larger than China’s thanks to the Bank of Japan’s continued reliance on ultra-low interest rates.

Kit Juckes, head of foreign exchange strategy at Société Générale, said that policymakers in Japan “can make the market wary of just ploughing straight through [Y150 to the dollar] but the underlying fundamentals are not yen friendly by any single stretch of the imagination”.

“I think you can get short-term respite, but you’re not going to get a stronger yen,” he added.