Old Habits Die Hard

China’s financial technocrats are at pains to demonstrate that the yuan is now a market-determined currency generally anchored to the movements of a trade weighted basket of global currencies. The problem for this argument is that Chinese authorities continue to intervene heavily around key levels and key events, with the defense of the 6.70 level surrounding the Chengdu G-20 finance ministers’ meeting last week a notable example, when the yuan strengthened even against a rising US dollar.

These arbitrary adjustments to the daily fixing and intervention damage the credibility of arguments that markets are now playing a larger role in the yuan’s movement, including the anchor to a trade-weighted basket. As a result, the PBOC’s policy intentions are once again the focus of markets’ thinking about the movement of the currency. As gradual depreciation expectations persist, capital outflows remain a threat to the sustainability of China’s currency defense, despite PBOC efforts to manage perceptions and emphasize their control.

Posted August 1, 2017
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