Tuesday’s Asian session was stirred by a surprise surge in the Chinese yuan.
Starting around 9:30am in Beijing, the yuan began rallying strongly against the dollar, with offshore rates declining (the yuan strengthening) to 6.7024 by 1pm, from rates earlier in the session around 6.73. Onshore yuan easily broke the 6.7 level and as of writing is holding steady in the mid-6.69s – a 10-month high in the yuan’s buying power.
The reason for the yuan’s rally is unclear, with some analysts linking the move to this morning’s Chinese trade data and other analysts to market speculation surrounding a potential widening of the yuan’s trading band.
It seems unclear how this morning’s data could have prompted such a reaction given that exports rose in July at their slowest pace since February (+11.2%) and imports at their slowest since December 2016 (+14.7%). And while the trade surplus of CNY 321bn beat the median estimate for a surplus of CNY 294bn, it was comfortably within the range of estimates (CNY 250-348bn) from economists polled by Bloomberg.
It appears more likely that this morning’s sudden rally will later be seen as the signal for a revision to the yuan’s trading band.
It has for some time been thought that China’s central bank, the People’s Bank of China, were considering allowing the yuan to trade with a greater degree of freedom around its daily reference rate, or ‘fixing’, against the dollar – a rate which is set daily by the PBOC after consideration of currencies from China’s main trading partners.
Currently, the yuan is restricted by the central bank to moves within 2% of the daily fixing. To allow the yuan to trade above and below this rate by 3% for example, would be to send a message to the rest of the world that the liberalization of China’s currency is on schedule and that China remains committed to long-term reforms.
A move to widen the band could also work to China’s advantage in trade talks with the US. While US president Donald Trump refrained from labelling China a “currency manipulator” earlier in the year in order to win Beijing’s support against an increasingly provocative North Korea, Trump had been very critical of China’s management of the yuan prior to his election victory. On the campaign trail, Trump went as far as to say that the level of dollar-yuan was “killing us.”
Against other FX majors, the yuan rose on Tuesday morning to a 3-week high against the Australian dollar, to 4-week highs against the Canadian dollar, British pound and New Zealand dollar, and to a 3-month high against the Swiss franc.
The yuan does, however, continue to struggle against the euro, against which it remains close to multi-year lows. EUR/CNY has risen (the yuan has fallen) more than 20% since March 2015.
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