As its trading partners in Europe and Japan have seen their currencies fall, China’s currency has looked increasingly overvalued. “To put it simply, in the short-term devaluation is possible, but in the long run a big devaluation is impossible as PBOC’s basic policy would continue endorsing two-way fluctuations and a general stability of the currency”.
Perhaps the PBoC felt it would be easier to accomplish its goals in a shocking bold move of short duration rather than, for example, a slow 0.2% per day grind spread out over a month or more, which might have seen an unbearable build-up in positions trying to front-run the move.
With that, it’s no surprise that China is beginning to fight back.
The PBOC lowered the central parity of RMB:Dollars further yesterday. It noted the fixing has shown significant deviation from market spot rate for a prolonged period, weakening its benchmarking function. US 2-year rates, just a couple of days ago near the highs for the cycle, are now near 1-month lows and a September rate hike is looking suddenly like a very low odds proposition. But it has to be said that intervention should not change the direction of the move, just the slope.
However, BBH says the move is “a vote of confidence in the ability of the financial market to absorb it”. China has been using its FX reserves to bolster the yuan and keep it in-line with the US dollar while the euro and everything else dive.
NZD: NZDUSD weakened below 0.6500 on the weight of the further CNY move, but let’s see whether market can sustain momentum and where we close the day. As a result, an unstable RMB might risk undermining these endeavours.
The market had anticipated that the RMB Yuan would experience some depreciation, and when the guiding rate was revised, to fully reflect this sentiment the market’s reaction was to bridge the previously accumulated differences between the previous rate and the market rate. These are to maintain a fixed exchange rate, exercise discretionary monetary policy and allow free capital flows. “China was attempting all three objectives to varying degrees”. Furthermore, the devaluation is likely to be merely the first step toward an eventual floating of the yuan, he says.
And we will have more analysis on the impact of China’s export sector later on in the biz segment.
The central parity rate of the yuan against the U.S. dollar is based on a weighted average of prices offered by market makers before the opening of the market and also refers to the closing rate on the previous day, in conjunction with supply and demand and the movement of major currencies.
