China Policy Watch-What the changing PBOC fix reveals
July 26 (Reuters) -China's swift and aggressive interest rate cutsthis week shocked investors, but there could be even more policy change to come, as Beijing pulls out the stops to revive the economy. FX policy might be the next lever to pull.
The central bank's daily yuan midpoint deserves more scrutiny than usual following Thursday's sharp USD/CNY drop linked to a Japanese yen surge, unwinding of carry trades, and suspectedChinese state bank intervention.
Friday's USD/CNY fix at 7.1270 was barely 0.1% below Thursday's,even though analysts' estimates were for a 0.6% drop.The discrepancy between the fix and forecasts slimmed to around 1000 pips from 1400, implying a greatly reduced damping factor was applied.
Thissuggests the People's Bank of China is trying to normalize the fix. If they had wanted more yuan appreciation (to deter bearish yuan speculators or to improve investor sentiment), they could have kept the damping factor withinits recent -1450/-1250 pips range. That would have plunged the fix to around 7.0900, triggering a shockwave in the FX market.
The takeaway is that China may want to step back fromartificially strong yuan benchmarks. If the USD keeps falling, the USD/CNY fix might only dribble lower, resulting in an eventual convergence with spot. That would create leewaywithin the daily trading band for the yuan to respondto negative risk factors.
Essentially, China may wantto create room for the yuan to weaken as a potential salve to higher U.S. trade tariffs - which seem likely no matter who wins the November presidential election.
For more click on FXBUZ
Ewen Chew is a Reuters market analyst. The views expressed are his own. Editing by Sonali Desai
Related Assets
Latest News
Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.
All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.
Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.
