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.
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Ewen Chew is a Reuters market analyst. The views expressed are his own. Editing by Sonali Desai
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