Offshore Yuan Tumbles as China Unveils Multi-Currency Indexby and
Move spurs speculation policy makers to allow more weakening
Currency declines to weakest since 2011 against greenback
The yuan declined the most since August in offshore trading as China published a new index that values it against a broad range of currencies.
The move by the China Foreign Exchange Trade System spurred speculation that policy makers want to reduce the currency’s link to the dollar and let it weaken further. The offshore yuan fell 0.5 percent to 6.5317 per dollar as of 4:39 p.m. in New York, the lowest level on a closing basis since April 2011.
The CFETS, which is run by the central bank to facilitate interbank trading, published a new yuan index that is composed of 13 currencies, which will “help bring about a shift in how the public and the market observe RMB exchange rate movements,” the organization said. The dollar accounts for 26.4 percent of the basket, while the euro makes up 21.4 percent. The yen has a weighting of 14.7 percent.
“They’re trying to recast yuan expectations going forward,” said Alexander Wolf, an economist at Standard Life Investments, said by phone from Edinburgh. “When they say they want a stable yuan, their view is stability on a trade-weighted basis, not dollar-yuan stability. It opens up the door for the yuan to depreciate against the dollar if we see more dollar strength.”
The announcement came after the People’s Bank of China allowed the decline of the yuan-dollar exchange rate to accelerate this month and the International Monetary Fund said it will add the currency to its reserve basket. The PBOC has reversed a policy where it had spent hundreds of billions of dollars to contain the drop stemming from its surprise devaluation in August.
Policy makers cut the yuan’s daily reference rate by 0.8 percent against the dollar this week, the most since Aug. 11 when made the fixing mechanism more market-oriented. The yuan trading onshore fell 0.8 percent this week to 6.4552 per dollar.
Before the August move, the yuan had traded closely with the U.S. dollar, dragging the exchange rate up with an appreciating U.S. currency. The inflation-adjusted yuan exchange rate has increased 35 percent against its trading partners over the past six years, making it more expensive than any other currencies traced except the Hong Kong dollar, which is pegged to the greenback, according to the Bank for International Settlements.
The appreciation was increasingly at odds with a weakening Chinese economy as it hurt exports. By tying to the dollar, it also essentially linked China’s monetary policy to the Federal Reserve’s and limited the central bank’s flexibility to cut interest rates. Futures traders see a 74 percent probability that the Fed next week will raise U.S. interest rates for the first time in almost a decade.
China’s creation of a multi-currency index is a “benign move” and “simply part of the evolution of China’s FX policy,” Brown Brothers Harriman & Co. analysts said in a research note.
A basket of currencies “can better capture the competitiveness of a country’s goods and services,” the PBOC said on its website.
Most emerging-market currencies declined Friday on speculation the yuan weakness may encourage developing-nation policy makers to allow their exchange rates to weaken. Goldman Sachs Group Inc. last month said that the biggest risk to developing-nation assets next year is a “significant depreciation” of the yuan.
“We’ve seen the currency weaken over the last several weeks, so it is not a terribly huge surprise,” Julian Emanuel, executive director of U.S. equity and derivatives strategy at UBS Securities LLC in New York, said on Bloomberg TV. “It points to this new volatility regime in markets that investors need to be prepared for. China opened the salvo to higher volatility in August, and we think that’s something you’re going to see a lot of in 2016.”