Photographer: Jerome Favre/Bloomberg
Yuan Looks More Like Floating Currency Now, Fed Study ShowsBy
Daily fix now largely passes on previous day’s dollar moves
Fix has less predictive power now than heavy-intervention era
China’s currency is looking more like its overseas peers nowadays, although its fluctuations in daily trading sessions continue to be "unusually low," according to an analysis conducted by Federal Reserve Bank of New York staff.
The official morning "fix" for the yuan, which sets the mid-point for its permitted fluctuations that day, has become "quite responsive to market forces," John Clark at the New York Fed wrote in a paper posted on the bank’s website. It now largely passes through movements in the dollar-yuan exchange rate over the previous day, the study concluded from a statistical analysis.
In recent months, when China’s intervention in the market has been limited, the fix itself has provided little insight into where the yuan heads during the day, Clark wrote. Instead, the dollar’s moves against the broad range of other currencies have been the dominant driver. And the yuan typically rises less than half as much against a basket of currencies now than it used to on days when the dollar has a broad gain, the study found, suggesting a weaker link with the greenback.
At the same time, the yuan’s intraday moves are "quite low compared to freely floating currencies," according to the paper. Clark noted that some observers have flagged the likelihood of "indirect intervention" during the day, where state-owned entities help to reduce volatility. Now that there’s effectively a "managed float" against a basket of currencies, that’s one of the areas where further examination would be helpful, Clark wrote.
The following are among the study’s findings:
- When the fix is set at variance with what models predict, that doesn’t necessarily serve as a signal from policy makers. Such surprises have "limited predictive power" for where the yuan heads during the trading day.
- There’s little evidence that the introduction of a "countercyclical element" to the fix earlier this year has translated through to the exchange rate.
- Authorities have improved their communication since the mid-2015 and early 2016 episodes when currency developments weren’t well explained and sparked surges in global market volatility -- partly from concern China might be seeking a weaker yuan.
- Foreign investors "may now be less inclined to infer intent from short-run dollar-driven yuan weakness."
- With the fix now visibly and predictably reacting to the dollar’s moves against counterparts, that "may have helped desensitize global markets to fluctuations in the value of the Chinese currency driven by broad dollar movements."
The paper investigated the key drivers of the yuan since early 2016, a period that incorporated the end of the currency’s three-year slide against the dollar, and its rebound this year. That coincides with a crackdown on capital outflows from China, along with this year’s broad weakening in the dollar.
A bigger test may come when there’s broader pressure for the yuan to weaken. That’s when Chinese residents’ behavior -- rather than foreign investors’ views -- will be key, the paper indicated. In the past, trend weakening has spurred Chinese residents to stock up on dollars and pay down dollar debt. "It remains to be seen" whether that’s changed, Clark wrote.