China’s Central Bank Raises Yuan Fixing by Most Since July 2005

  • Greenback fell 1% on Thursday as BOJ decision lifted yen
  • Offshore yuan's reaction muted as stronger fixing expected

Why the PBOC Strengthened Yuan Fixing

China’s central bank responded to an overnight tumble in the dollar by strengthening its currency fixing the most since a peg was dismantled in July 2005.

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The reference rate was raised by 0.6 percent to 6.4589 per dollar. A gauge of the dollar’s strength extended its 1 percent slide on Thursday, when the Bank of Japan’s decision to unexpectedly keep monetary policy unchanged sent the yen surging. The offshore yuan weakened 0.12 percent to 6.4914 as of 5:35 p.m. in Hong Kong after gaining 0.3 percent in the last session.

While the change in the fixing is extreme relative to the small moves of recent years, analysts said it reflects increased volatility in the dollar against other major exchange rates rather than a policy shift by the People’s Bank of China. The yuan weakened against a basket of peers on Friday.

“The offshore yuan’s reaction is muted, so it seems the market was already expecting a much stronger fixing,” said Ken Cheung, a currency strategist at Mizuho Bank Ltd. in Hong Kong. “This is a reaction to the dollar weakness overnight, and there’s not much in the way of policy intention to read into.”

The dollar headed for its the lowest close in almost a year on Friday as signs of slowing growth in the U.S. dimmed prospects for a Federal Reserve interest-rate increase. A Bloomberg replica of the CFETS RMB Index, which measures the yuan against 13 exchange rates, fell 0.2 percent to a 17-month low. The onshore yuan weakened 0.2 percent.

“The fixing is no surprise, the expectation for a stronger yuan fix was laid by the gains for the yen after the Bank of Japan announcement yesterday,” said Patrick Bennett, a strategist at Canadian Imperial Bank of Commerce in Hong Kong. “The trade-weighted basket continues to depreciate, albeit at a modest pace. But the key to the lower trade-weighted rate does not really lie with the PBOC, rather it is the dollar weakness against other major currencies which is the main driver.”

— With assistance by Tian Chen

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