Yuan Fixing Is Back in Focus as Declines Deepen Against Peers

Yuan Posts Two-Day Drop Against Basket
  • Central bank surprises traders with reference rate this week
  • Yuan caps biggest four-day drop against basket since February

The yuan fixing is back in the spotlight as the currency slides to its weakest level since October 2014 against a basket of peers.

QuickTake The People’s Currency

The central bank surprised traders this week by setting the reference rate at weaker-than-expected levels, helping send the currency to its biggest declines in four months versus a trade-weighted basket that includes the yen and the euro. The fixing had become more predictable since early February after the People’s Bank of China pledged greater transparency and the yuan increasingly tracked movements in the dollar against major currencies.

The Chinese currency declined 0.2 percent on Wednesday against a Bloomberg replica of the CFETS RMB Index, taking its four-day loss to 1.1 percent. While a gauge of the greenback’s strength fell 0.4 percent overnight, the PBOC set the fixing just 0.04 percent stronger.

Traders worldwide became obsessed with the fixing in January after a sudden weakening fueled fears of a devaluation and triggered global market turmoil. During the subsequent three months, the central bank adopted a more market-based system to set the reference rate and said the basket would play a bigger role.

Raise Questions

“If the yuan continues to depreciate against the basket of currencies when the dollar has stabilized that may not be a good thing -- that reminds us of what happened in January,” said Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore. The fixings this week “raise some questions over whether the numbers have been a bit off.”

The yuan was little changed at 6.5706 per dollar as of 4:41 p.m. local time, while the offshore yuan was also steady at 6.5765.

The yuan’s pricing mechanism is increasingly transparent and its rate against a basket of currencies may alternate between appreciation and depreciation, Ma Jun, chief economist of the PBOC’s research bureau, said in comments to Bloomberg News on Tuesday.

The fixing -- from which the spot rate can diverge a maximum 2 percent -- is set using the previous day’s onshore close, overnight moves in major currencies, as well as market demand and supply.

Yet this week the levels have been weaker than that model would suggest. The reference rate was weakened 0.2 percent Tuesday even after the Bloomberg Dollar Spot Index held steady overnight. The fixing was strengthened 0.45 percent Monday, after Commerzbank AG estimated the rate would be set 1 percent stronger following the dollar’s plunge on Friday. That fixing was within 0.02 percent of a Bloomberg model.

Downside Bias

Analysts at banks including Barclays Plc, Deutsche Bank AG and Bank of America Corp. have said in the past month the fixing responds to dollar moves asymmetrically, reacting more to strength in the greenback than weakness. Such a bias pushes the yuan down against its peers, helping to aid exports. Overseas shipments dropped 4.1 percent in May, the most in three months, data Wednesday showed.

“The government probably anticipates that when the dollar recovers, yuan depreciation against the basket will be more difficult to attain without risking rekindling fears about devaluation,” said Ray Farris, Singapore-based head of Asia macro strategy at Credit Suisse Group AG. “The government is probably building a bit of a cushion in the level versus the basket for strong dollar scenarios.”

Wild Card

China’s devaluation of the yuan in August took traders by surprise, roiling global financial markets. U.S. Treasury Secretary Jacob J. Lew on Monday urged China to improve monetary-policy communication as the country takes on a larger role in the global economy.

“The wild card for investors is China’s unique system of governance under which policy direction can -- and often did -- change overnight and with little warning,” said Pauline Loong, managing director at Asia-Analytica Research in Hong Kong. “This means that on the slightest talk of policy change, the knee-jerk reaction of renminbi holders is panic and a rush for the exit while the doors are still open.”

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