(Bloomberg) -- The Chinese yuan is facing multiple headwinds. Now comes the Golden Week holiday, when trading will be frozen in mainland China, but continues in most other places worldwide — thus potentially creating disconnects with other assets.
During the eight-day holiday period, there won’t be any daily reference rates during the closing of the onshore market. Volumes are already declining into the period, as the People’s Bank of China tightens its grip on the currency, reducing room for traders to place directional bets.
The lack of daily fixings will probably boost intraday volatility for the offshore yuan, said Alvin Tan, head of Asia FX strategy at RBC Capital Markets in Singapore. He predicts the currency will remain steady on a daily closing basis during the period and that authorities will be prepared to intervene as necessary.
The yuan faces increasing pressure due to the large rate differential between the US and China, as a hawkish Federal Reserve has sent the greenback higher against almost all emerging Asian currencies this year. The yuan itself is down more than 5% in that time frame. A weaker yuan could exacerbate the biggest capital outflows in years, which might create a vicious cycle while sending ripple effects into the broader financial markets and economy.
However, the government’s possible support for the beleaguered currency and the high costs in shorting the yuan may keep bears on the sidelines.
Chinese authorities have ramped up an aggressive defense, with the PBOC setting the daily reference rate for the yuan at the record biases several times this month. Authorities also sent verbal warnings, as state banks were said to sell dollars and squeeze offshore liquidity frequently to push up costs for shorting the yuan.
The offshore yuan rose 0.1% to 7.318 per dollar Thursday. Zhou Hao, chief economist at Guotai Junan International in Hong Kong, sees policy makers keeping a close eye on the 7.30 mark, and sees the worst as over for the currency.
And while the yuan should face downward pressure during the holiday, authorities may keep it in the 7.3 to 7.35 zone, said Jonas Goltermann, deputy chief markets economist at Capital Economics.
The yuan fix “is only a signaling device,” he said. “Poor liquidity conditions in the CNH market are likely during the holiday period, which may actually make it easier to keep USD/CNH in check. It will be interesting to see where the fix is set after the holiday period.”
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