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Summary:PBOC cut FX risk reserve ratio to 0% from 20%, effective March 2Move reduces cost of betting against yuan via forwardsUSD/CNY midpoint held at 6.9228, defying expectations for fresh lowsUSD/CNH rebounded as traders pared yuan-long positionsAnalysts see USD/CNY stabilising in 6.90–6.95 rangeChina’s central bank has signalled that the rapid appreciation in the yuan may have gone far enough for now, prompting traders to reassess bullish positions.The People’s Bank of China (PBOC) announced it would scrap the 20% foreign-exchange risk reserve requirement for forward FX sales, cutting it to zero effective March 2. The measure reverses a September 2022 tightening that was originally introduced to stem sharp yuan depreciation and capital outflows.By removing the reserve requirement, effectively a “speed bump” on forward dollar purchases, the PBOC has lowered the cost of shorting the yuan and buying dollars via forwards. While officials framed the decision as supporting enterprises in managing exchange-rate risks, the timing suggests policymakers are also keen to temper one-way appreciation pressure after the currency recently climbed to near three-year highs against a softer dollar.In a further signal, the PBOC held the daily USD/CNY midpoint at 6.9228, resisting expectations for another fresh 33-month low. The steady fix, combined with stronger USD-positive damping, is seen as establishing a near-term floor around Thursday’s trough near 6.8310.The immediate market response saw USD/CNH rebound, with traders trimming crowded yuan-long bets. Analysts expect USD/CNY to rise moderately before stabilising in a 6.9000–6.9500 range, reflecting a policy stance aimed at smoothing gains rather than reversing direction outright.Chart signals also point to fading downside momentum in USD/CNY. A long-tailed doji formation suggested exhaustion in the recent decline, while a break above the 6.8868 Bollinger channel ceiling would reinforce the case for a corrective bounce toward the 21-day moving average near 6.9235 and potentially toward the upper channel around 6.9560.Over the past decade, the PBOC has repeatedly adjusted the FX risk reserve ratio to manage two-way currency pressures. The latest move fits that pattern: not an attempt to weaken the yuan materially, but a calibrated step to curb excessive strength and damp volatility.
This article was written by Eamonn Sheridan at investinglive.com.
đź’ˇ DMK Insight
The PBOC’s decision to cut the FX risk reserve ratio to 0% is a game changer for traders focused on the yuan. By making it cheaper to bet against the yuan, this move could lead to increased volatility in the USD/CNY pair, especially as the midpoint holds at 6.9228. Traders should be aware that this shift signals a potential stabilization in the 6.90–6.95 range, but it also opens the door for speculative plays. If the yuan continues to weaken, we might see a rush to hedge against it, which could push USD/CNY higher. Watch for any shifts in sentiment from institutional players, as their moves could amplify volatility. The real story is how this impacts related markets; a weaker yuan could affect commodities and emerging market currencies, so keep an eye on those correlations. For immediate action, monitor the USD/CNY levels closely, especially if it approaches the 6.95 mark, as that could trigger further positioning from traders looking to capitalize on the PBOC’s policy shift.
đź“® Takeaway
Watch USD/CNY closely; if it approaches 6.95, expect increased volatility and potential trading opportunities.
