Despite the central bank taking measures to rein in the currency's weakness, China's yuan touched a 28 month low against the dollar on Monday, but it was only steps away from its downside trading limit.
The People's Bank of China PBOC said it would raise the foreign exchange risk deposits for financial institutions when purchasing FX through currency forwards to 20 per cent from the current zero, starting on Sept. 28.
The announcement, along with another firmer than expected daily midpoint fixing, was meant to slow the pace of yuan depreciation by making it more expensive to bet against the currency, traders said.
Analysts at Maybank said that this could stem further forward positions that have been negative for the yuan and slow its depreciation pace.
The previous fix of 6.992 on Friday was the lowest since July 7, 2020, as the PBOC set the midpoint rate at 7.0298 per dollar, 378 pips or 0.54 per cent less than the previous fix of 6.992 on Friday.
The midpoint came in much stronger than market projections for the 23rd straight trading session, traders and analysts said. It was 279 pips stronger than the 7.0019 estimate of Reuters.
The official daily midpoint fixing limits the onshore yuan to trade in a narrow range of 2 per cent above or below, and Monday's guidance kept the range between 6.8892 and 7.1704.
The onshore yuan opened at 7.1400 per dollar and fell to a low of 7.1690 at one point, the lowest level since May 27, 2020 - mirroring broad falls in other currencies due to the U.S. Federal Reserve's tightening of monetary policy.
It was changing hands at 7.1662 at midday, 364 pips weaker than the previous late session close. The midday level was 42 pips away from the lower end of the trading band.
The market is almost at the limit, said a trader at a foreign bank.
Market participants believe more policy actions would be rolled out if the yuan's weakness persists.
Considering the weak CNY level, it is likely that PBOC will roll out measures to remove the market's one-side depreciation of CNY against the U.S. dollar in the near term, said Li Lin, head of global markets research for Asia at MUFG Bank.
Li expects to cut the amount of foreign exchange banks must hold as reserve after a reduction earlier this month.
The global dollar index was close to its two-decade high of 113.996 at midday, while the offshore yuan was trading at 7.1704 per dollar by midday.
There is a negative number that spot yuan is trading stronger than the midpoint. The exchange rate can be raised or fall 2 per cent from the official midpoint rate that is set each morning by the People's Bank of China PBOC.
Non-deliverable forwards are settled against the midpoint, which reflects the difference between the official midpoint and PBOC's official midpoint.