PBOC calls on banks to hold off on immediate dollar purchases – report

<p>The report is via Reuters, citing two sources with knowledge of the matter. It is said that the PBOC has asked some of the big banks to refrain from immediately squaring their market positions and to let it run open in order to alleviate further downside pressure on the Chinese yuan.</p><p>Adding that the banks have been asked not to square their positions after any US dollar sales to clients, until their spot foreign exchange position hits a certain level. Mind you, all of this is a rather informal guidance and one that can only be done in a not so "free market". I had been on a trading floor when this was done in my country back in the day as well and imagining it happen made local officials look extremely amateurish to say the least.</p><p>In essence, what they are doing here is trying to ask the banks to absorb the dollar purchases by firms and sit on that before only going back into the market to square those positions later in the day. It would at least temporarily relieve the pressure on the yuan currency but I would be interested to see what rate they would do that.</p><p>In my previous experience, the exchange rate was also split to an onshore and offshore market. In that instance, the onshore market was controlled by the central bank mostly and they dictated what rate those positions were to be squared at come day end i.e. they already set a limit to not allow the exchange rate to exceed a certain point by verbal warning (unofficial policing).</p><p>When you witness it first hand, you know that there is real trouble brewing. At the time when I was on the trading floor, the only thing I could think of was to tell everyone to get out of the local currency and move it somewhere else. I can imagine that could be what is running through the heads of Chinese traders as well when the PBOC is getting this desperate.</p>

This article was written by Justin Low at www.forexlive.com.