Offshore Yuan Weakens to 6.85 Per Dollar After PBOC Policy Shift
Offshore Yuan Weakens to 6.85 Per Dollar after the People’s Bank of China (PBOC) announced a major policy adjustment. As a result, the currency snapped a four-day rally and pulled back from a two-year high. This move has created fresh volatility in the USD/CNY pair and raised new questions for forex traders.
However, this weakness is not random. Instead, it reflects a calculated shift in China’s currency management strategy. Therefore, understanding the reason behind this move is essential for traders and investors.
PBOC Cuts Foreign Exchange Risk Reserve Ratio to Zero
The PBOC announced that it will reduce the foreign-exchange risk reserve requirement ratio from 20% to 0%, effective March 2. Previously, this ratio made it expensive to hold dollar forward contracts. Now, with the ratio at zero, forward dollar positions become cheaper.
As a result, market participants can hedge or take positions against the yuan at lower cost. Consequently, this increases short-term pressure on the currency.
In contrast, back in September 2022, the central bank raised the ratio to 20% to stop rapid depreciation. At that time, the priority was to prevent capital outflows. Now, however, the concern is different. The authorities want to slow down excessive appreciation.
Daily Fixing Signals Policy Intent
In addition, the PBOC set the daily midpoint fixing at 6.9228 per dollar. Notably, this was nearly 800 pips weaker than Reuters’ estimate. In fact, this marked the largest deviation on record.
This is important because the daily fixing acts as a reference rate. When the fixing is weaker than expected, it usually signals that policymakers prefer a softer currency.
Therefore, the message is clear: authorities are trying to manage the pace of yuan strength.
Why Would China Slow Yuan Appreciation?
A stronger currency may look positive. However, it can create economic pressure.
- First, it reduces export competitiveness.
- Second, it tightens domestic liquidity conditions.
- Third, it may hurt manufacturing margins.
Because China is heavily export-driven, policymakers often intervene to maintain balance. As a result, the current move appears preventive rather than reactive.
USD/CNY Technical Outlook
From a technical perspective, traders should monitor key levels carefully.
- Support: 6.80 zone
- Resistance: 6.95 – 7.00 psychological level
- Short-term bias: USD strength
Although Friday showed weakness in the yuan, the broader weekly performance remains strong. In fact, the offshore yuan is still on track for its strongest week since April 2023.
Therefore, this pullback may represent consolidation rather than trend reversal.
Impact on Global Markets
The yuan does not move in isolation. Instead, it influences several global markets.
- Emerging market currencies
- Commodity prices
- Asian stock indices
- Global risk sentiment
For example, a weaker yuan can support Chinese exports. On the other hand, it may increase volatility across Asian markets.
Thus, forex traders must track both policy signals and technical patterns.
How Traders Should Respond
First, monitor daily midpoint fixings closely. Second, compare PBOC policy direction with Federal Reserve decisions. Third, watch capital flow data.
Most importantly, avoid emotional trading. Central bank policy often overrides technical indicators in the short term.
You can monitor real-time movements on our Live Market Data page.
If you need guidance, you can Book a Free Trading Consultation with our experts.
New traders can start with our structured Trading Guide or join our Professional Courses.
Long-Term Outlook
In the long run, the yuan remains under a managed float system. Therefore, large uncontrolled depreciation appears unlikely.
However, short-term volatility will continue. This is mainly due to global interest rate divergence and capital flow dynamics.
Consequently, traders should expect controlled movements rather than extreme swings.
Frequently Asked Questions
Why did the offshore yuan weaken to 6.85?
It weakened after the PBOC reduced the foreign-exchange risk reserve ratio to zero. This lowered the cost of dollar forward contracts.
Is this a long-term bearish signal?
Not necessarily. The move appears to be a policy adjustment to control appreciation rather than start depreciation.
Will USD/CNY break 7.00?
Short-term testing of 6.95–7.00 is possible. However, strong policy control reduces the probability of sharp breakout.
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