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The central bank continues steering the yuan upward
The People's Bank of China (PBOC) set its daily USD/CNY reference rate at 6.7521 on Thursday, according to ForexLive (investinglive.com). The rate was weaker than the market's expectation of 6.7065, but nevertheless represents the strongest level for the Chinese currency since February 3, 2023.
PBOC manages the yuan through a daily fixing that sets a reference for trading. The actual exchange rate is allowed to fluctuate within a band of plus/minus 2 percent around this level. The fixing is thus the central bank's most important tool for signaling where it wants the currency to be, without having to intervene directly in the market every single day.
Major liquidity injections the same day
Alongside the currency fixing, PBOC carried out significant liquidity operations. The central bank injected 463.3 billion yuan through 7-day reverse repo agreements at a rate of 1.40 percent, in addition to 100 billion yuan via 14-day repos. Combined, this amounts to over 560 billion yuan – equivalent to around 78 billion US dollars – injected into the Chinese banking system in a single day.
Such operations are part of PBOC's ongoing work to manage liquidity in the banking system, often linked to seasonal variations in credit demand or the need to stabilize bond markets and government debt. According to previous mappings of PBOC's operations, the central bank has in periods injected over 2.4 trillion yuan in aggregate through similar repo windows and medium-term lending facilities (Medium-term Lending Facility).
Why this isn't just a Chinese matter
PBOC, the US Federal Reserve, and the European Central Bank together control over 80 percent of global investable liquidity, according to analyses from CrossBorder Capital. When the Chinese central bank loosens domestic credit conditions, the effect can spread to global risk markets – including stocks and digital assets – even though Chinese citizens remain prohibited from trading cryptocurrency directly under the so-called "Notice #42" rules.
Michael Howell, managing director at CrossBorder Capital, has previously pointed out that the relationship between global liquidity and a basket of cryptocurrencies remains strong, with a time lag of around three months and a rolling correlation close to 0.57. He also emphasizes that Chinese liquidity primarily affects Bitcoin indirectly, through capital flight via Hong Kong-based OTC desks and demand for gold, since direct crypto trading is illegal on the mainland.
A critical look at the M2 correlation
Not everyone agrees that such relationships are robust. Julio Moreno, head of research at CryptoQuant, has warned against simplified charts that link Bitcoin directly to global money supply (M2), pointing out that there is no daily M2 data, and that Chinese M2 in practice almost always grows. Historical discrepancies – such as when Bitcoin peaked in November 2021 while global M2 continued rising for several more months – illustrate that liquidity flows can set the framework for the market without precisely explaining short-term movements.
What this means for the market going forward
For the currency market, today's fixing is a signal that PBOC still wants a gradually stronger yuan, while the central bank maintains tight control over the pace through its "counter-cyclical factor" mechanism to shield the export industry from too rapid appreciation. A stable or slightly strengthened yuan has historically coincided with a weaker US dollar index (DXY), which in turn has been a contributing factor behind risk-friendly periods in global markets – including the crypto market, where Bitcoin is now trading around 77,500 dollars with a Fear & Greed index of 56, i.e. a neutral sentiment.
For Norwegian investors, the direct link to the Oslo Stock Exchange is limited, but movements in the Chinese currency and the central bank's liquidity policy can affect commodity prices and general risk appetite globally, which indirectly affects oil-priced export industries and the broader sentiment in international markets.
This article is based on reporting from ForexLive/investinglive.com as well as background material on PBOC's currency mechanisms and global liquidity theory.
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