(Bloomberg) -- The onshore yuan is on track for a seventh month of losses, and things could get even worse for its less-regulated offshore exchange rate as China goes on a one-week holiday.

The currency traded in Shanghai is matching a record run of monthly losses set during the height of the US-China trade war four years ago. Its realized volatility this week spiked to a level unseen since 2020 as the exchange rate was buffeted by the dollar’s surge and Beijing’s steps to resist yuan weakness.

Next week, the offshore yuan -- which is subject to less control by the central bank -- loses an important anchor. With mainland markets closed for the Golden Week holidays starting next week, Beijing won’t be able to guide investor expectations with its daily reference rate, which is set each morning by the central bank and limits onshore yuan moves to 2% on either side. That would make the overseas yuan even more vulnerable to the dollar’s surge.

China’s central bank appears to be girding itself for any disorderly trading next week. The People’s Bank of China set the fixing at a stronger-than-expected level for the 27th day, the longest run of stronger fixings on record since Bloomberg started the survey in 2018. It also asked major state-owned banks to be ready to sell dollars to prop up the yuan overseas, Reuters reported Thursday citing people with knowledge of the matter. That’s after issuing strongly-worded statement on Wednesday to deter currency speculators.

That’s because some of the largest deviations between the onshore yuan’s closing price and the offshore unit have occurred when Chinese markets were closed for a holiday. The offshore yuan traded 890 pips weaker than its onshore counterpart on the May 3 Labor Day holiday, the largest gap this year. Trading during the mid-Autumn festival holiday in September 2015 was particularly volatile as the currency deviation exceeded 1000 pips.

“The PBOC is trying to bring some stability to the market, but the problem is that the dollar is too strong,” said Geoffrey Yu, senior FX strategist at Bank of New York Mellon. “If the US data remains strong, there’s not much central banks can do to stop the dollar rally.”

The central bank’s measures so far have only slowed yuan losses. That’s because China’s monetary policy is diverging further from the US, driving outflows. While the Federal Reserve retains a hawkish stance in its efforts to curb US inflation, Beijing is keeping an accommodative policy amid signs the Asian economy is cooling due to Covid lockdowns and a housing-market crisis.

Earlier this week the PBOC imposed a risk reserve requirement of 20% on currency forward sales by banks to make it more expensive to short the yuan. That’s after a move to reduce the foreign-currency reserve requirements for banks. 

While the PBOC has other tools at its disposal to stem yuan losses it may be holding back from doing so for now as may be focusing on slowing the pace of the depreciation rather than defending a specific level. The yuan is also holding relatively steady against currencies of its 24 major trading partners, data from a Bloomberg real-time tracker of the CFETS RMB Index show. A weaker yuan isn’t necessarily bad for China as it could make the nation’s exports more competitive and aid in boosting the economy.  

Bearishness prevails in the derivatives market. Traders added the most short yuan options this month so far this year, with the nominal value of bearish wagers standing at about four times the size of bullish bets, Bloomberg-compiled data show. Three-month risk reversals, which measure the cost of hedging against offshore yuan losses, jumped to the highest since May this week.

The offshore yuan will remain at the mercy of the dollar in the coming week, said Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore. The currency that trades in Shanghai may retest 7.25 per dollar into next year. 

“It is not really the yuan’s fault,” he said. “The dollar is simply too strong.” 

(Updates throughout.)

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