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Yuan off 17-month high after PBOC lowers forward reserve requirements

SHANGHAI, Oct 12 (Reuters) - The yuan retreated from a 17-month high on Monday as investors unwound their long yuan positions in early trade after the central bank cut foreign exchange forward reserve requirements.

Over the weekend, the People’s Bank of China (PBOC) announced it would lower to zero from 20% the reserve requirement ratio for financial institutions when conducting some foreign exchange forwards trading, with effect from Monday.

The reduction, which effectively lowers the cost of shorting the Chinese currency, came after a recent sharp rally in the yuan.

“The relaxation likely signals the PBOC’s discomfort of the rapid appreciation of CNY recently,” Goldman Sachs said in a note.

The onshore spot yuan opened at 6.7268 per dollar, and eased to a low of 6.7310 and was fetching 6.7198 as of 0145 GMT, 266 pips weaker than the previous late session close. The spot yuan posted its biggest one-day gain since 2005 on Friday.

Its offshore counterpart weakened to a low of 6.7509 in early Asian trade before settling at 6.7182 as of 0145 GMT.

Some analysts said the PBOC had adjusted the risk reserve requirements multiple times over the past few years to contain strong one-way bets and rapid moves in the yuan.

“While markets will take notice of this move by the PBOC, we do not necessarily see it as a signal that they are uncomfortable with the recent gains,” said Khoon Goh, head of Asia research at ANZ in Singapore.

“The fixings this week will be more important in that regard. If the fixings are consistently on the weaker side of expectations that would be a sign that they would like a pause to the yuan strength.”

On Monday, the PBOC set the midpoint rate at 6.7126 per dollar prior to market’s open, the strongest since April 23, 2019, but it was still much weaker than market projections.

Reporting by Winni Zhou and Andrew Galbraith Editing by Shri Navaratnam

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