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Yuan Finds Stability After PBOC Policy Change

The Chinese yuan posted its highest open in 4 ½-weeks on Monday, at a rate of 6.803 to the dollar. Stability in the rapidly falling yuan follows the reintroduction of the “counter-cyclical factor” by the People’s Bank of China on Friday – a sign that Chinese authorities are uncomfortable with further depreciation.

On Friday, the reintroduction by the PBOC of the mysterious “counter-cyclical factor” (CCF) helped the yuan avoid an eleventh consecutive week of losses. The yuan’s rapid depreciation between mid-April and mid-August, from levels near 6.27 to 6.935 per dollar, will have been a concerning development for Washington and was seen by many analysts, and by US President Trump, to be China’s way of reducing the impact of this year’s massive US trade tariffs.

When last seen on Monday morning (10am GMT+1), the yuan had weakened slightly from its open of 6.803 to 6.822.

The CCF is an adjustment to the PBOC’s usual method for determining the day’s dollar-yuan midpoint, or “fix.” The CCF remains anyone’s guess though. “Many understand the term to mean the central bank will try to fight whichever direction market forces are pulling the currency,” writes CNBC’s Kelly Olsen.

Under China’s managed float system, daily changes to the yuan’s value are restricted to moves of 2% above or below the fix, which on Monday was announced at 6.8508, 0.3 percent firmer than Friday’s fix of 6.8710.

While a weaker currency is better for Chinese exporters, excessive depreciation may spark capital outflows, which Beijing and the PBOC will be hoping to avoid.

The major reference point for the yuan will of course remain 7.0 to the dollar. While dollar-yuan has traded north of 6.9 several times in recent years, 7.0 to the dollar hasn’t been seen since May 2008.

Per CNBC, Mizuho wrote on Monday that China’s decision to reintroduce the CCF might be “a coded signal for a yuan strengthening policy.”

Earlier in August, Europe’s largest bank, HSBC, predicted that the yuan would strengthen versus the dollar to 6.7 by year-end. The market was overly pessimistic, HSBC suggested.

Please note that the opinions of our authors are their own and do not reflect the opinion of Best Exchange Rates and should not be taken as a reference to buy or sell any financial product.

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