China's central bank is signaling a growing willingness to tolerate yuan exchange rate flexibility.
This demonstrates the regulator's confidence in its ability to protect the national currency from market turmoil triggered by the war in Iran.
According to Bloomberg, the 30-day volatility of the daily yuan reference rate, set by the People's Bank of China (PBOC), reached its highest level since December 2024 this week.
The increased volatility of the daily fixing (the value from which the yuan's domestic exchange rate can deviate by no more than 2% in either direction) suggests that Beijing is encouraging two-way exchange rate fluctuations rather than maintaining a single-direction currency movement.
"At the moment, the PBOC is quite comfortable with allowing markets to determine the yuan's direction," notes Fiona Lim, a strategist at Maybank. "This inevitably introduces a certain volatility into the fixing process."
After reaching its highest level in nearly three years at the end of February, the yuan has settled into a narrow range, abandoning its unidirectional rally as markets digest the latest geopolitical shocks.
This month, amid the war in the Middle East, the Chinese currency has fallen by approximately 0.1%. However, thanks to support from the regulator and strong export performance, its losses were less than those of other Asian currencies.
On Wednesday, the People's Bank of China set the yuan's reference rate at 6.8917 to the dollar—its strongest level since 2023. In trading, the yuan hovered around 6.87.
Last week, People's Bank of China Governor Pan Gongsheng reiterated that China does not seek to devalue the yuan for trade advantages. This move was intended to quell speculation about a possible opportunistic weakening of the yuan amid a strengthening dollar. Analysts expect positive sentiment toward the Chinese currency to persist ahead of Donald Trump's visit to Beijing later this month, as Chinese authorities are banking on a stable currency environment to smooth diplomatic negotiations.
The yuan remains a relative safe haven thanks to the resilience of China's macroeconomic fundamentals, according to Eddie Cheung, a strategist at Credit Agricole CIB.