Maths, Not Meddling, May Explain End of Cuts in PBOC Yuan Rate

  • Stabilization of fixing may reflect dollar fall: Goldman
  • Reference rate was raised 0.02%, ending eight-day slide

A halt to the eight-day streak of weaker yuan fixings by China’s central bank may be a sign it will more strictly adhere to a mechanism announced in August that’s designed to make the exchange rate more market-driven, according to Goldman Sachs Group Inc.

The currency gained Friday after the People’s Bank of China set its reference rate at 6.5636 a dollar, little changed from Thursday. While that’s 0.46 percent stronger than the previous day’s effective close of 4:30 p.m. in Shanghai, a gauge of dollar strength fell by about 0.4 percent between then and the fixing’s release. The monetary authority has previously said daily fixings would be based on the 4:30 p.m. level, moves in major currencies, as well as demand and supply factors.

The PBOC’s commitment to the fixing’s mechanism was called into question over the last four days as the reference rate was weakened by 1.1 percent in a pattern that was at odds with where currency moves suggested it would be set. Barclays Plc and ABN Amro Bank NV say it may have been strengthened on Friday to calm markets after stocks plunged by the maximum daily limit on two days this week and the yuan sank to a five-year low.

One interpretation is "they want to adhere to their August fixing rule a little bit more closely," said MK Tang, an economist at Goldman Sachs in Hong Kong. "From today onward they may put a stronger emphasis on the basket’s movement against the dollar overnight, in a way that would strengthen the transparency of the new fixing mechanism introduced in August."

Tang added another interpretation is the market volatility prompted the PBOC to decide to release the yuan’s pent-up depreciation pressure more slowly than in the last couple of days, during which the dollar’s moves against a basket of currencies played a "limited role." For example, the fixing on Thursday was 0.1 percent weaker than the prior day’s 4:30 p.m. level in Shanghai even as the dollar slipped versus peers in the interim period.

China set up a new yuan index composed of 13 currencies in December, saying that the currency’s performance shouldn’t be measured against the dollar alone.

"People may have underestimated the speed at which they wanted to achieve reform in the exchange-rate regime," Tang said. "They want to move people’s focus to a basket approach rather than just the dollar-yuan rate and also weakening the currency to release the pent-up pressure could pave the way to an ultimate free float."