SHANGHAI (Reuters) – Major Chinese state-owned banks pushed the yuan up sharply against the dollar on Tuesday afternoon, after it fell through a key psychological support level in the previous session.

The yuan’s sharp decline to 5-1/2 year lows has aggravated investors already rattled by slow global growth and potential fallout from Britain’s decision to leave the European Union.

Many market watchers expect the central bank will allow the yuan to weaken even further in coming months if the economy continues to struggle, though some believe it may allow a more gradual decline after a sharp 3 percent fall so far this year.

The yuan slipped below 6.7 per dollar for the first time since late 2010 on Monday after state-bank support tapered off, but on Tuesday they appeared more persistent.

It officially closed at 6.6893 to the dollar at 4:30 pm, up nearly 0.2 percent from Monday. Markets keep trading until 11:30 p.m. to overlap with Europe’s trading day.

Traders believe aggressive dollar sales by state banks late on Tuesday were done at the behest of the central bank. That sets the stage for the People’s Bank of China to guide the currency into firmer territory when it sets the midpoint fixing rate on Wednesday.

“The central bank turned into attack mode in the afternoon,” said a trader at a Chinese commercial bank in Shanghai.

“It might be angry about all the publicity around yuan depreciation.”

The yuan’s brief slide past the 6.7 milestone came on the eve of the U.S. Republican National Convention, where presumptive presidential nominee Donald Trump is to be formally announced. In June, Trump called China a “grand master” of currency devaluations and urged a tax on imports.

The moves also come just days before China hosts G20 finance ministers and central bank governors, who in April reaffirmed a pledge to not set exchange rates for competitive purposes.

Treasury Secretary Jack Lew will nonetheless still emphasize the need to avoid competitive currency devaluations at the meeting in Chengdu, a senior U.S. official said on Monday.

Beijing has been suspected of engineering brief rallies in the yuan in the run-up to major diplomatic events in the past to deflect criticism that it is deliberately suppressing the rate.

While China’s economy grew slightly more than expected in the second quarter, exports continued to fall and investment is cooling rapidly, suggesting a loss of momentum later in the year and keeping fears of capital outflows alive.


Quoting policy sources, Reuters reported earlier this month that Beijing would tolerate a fall in the yuan to as low as 6.8 per dollar in 2016. That would equate to fall of 4.5 percent for the year, the same as last year’s record decline.

Beijing has said that it won’t use the yuan to gain a trade advantage, adding it is committed to “market-oriented exchange rate reform”. In recent years what interventions the PBOC has conducted appear to have been aimed at keeping the yuan from falling too quickly and risking destabilising capital flight.

Since the shock Brexit vote on June 23, China has allowed the yuan to fall about 1.8 percent against the dollar. It has fallen nearly 2 percent against an index measuring the yuan against basket of currencies calculated by Reuters.

“It seems to me China’s central bank has put a brake on CNY depreciation, at least temporarily,” Zhou Hao, senior emerging markets economist at Commerzbank AG, said in a note.

But others weren’t so sure.

Kevin Lai, chief economist Asia Ex-Japan at Daiwa Capital Markets in Hong Kong, said in light of the possibility that Trump might win the U.S. election in November, now was not a bad time to let the yuan shed some value.

Yuna Park, currency and bond analyst at Dongbu Securities in Seoul, expected the yuan to weaken to 6.8-6.9 by year end.

“The PBOC is unlikely to stop the yuan’s weakness although it may slow down the speed of depreciation. Although China emphasises domestic demand, the economy is still export-oriented.”

(Reporting by the Shanghai Newsroom and Nathaniel Taplin; Editing by John Ruwitch and Kim Coghill)

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