Testing Times for the Yuan

While the equity market’s 6.86% decline on Monday attracted more attention in a rough opening session for global markets in 2016, the Chinese currency’s single-day depreciation was the largest since the August 11 currency adjustment. Similarly, the daily fixing on Tuesday diverged from the previous day’s close (with the yuan set stronger) by the largest margin since the August move, suggesting the PBOC remains uncomfortable with rapid depreciation of the currency. Trends in these inter-day pricing differentials point to the PBOC using the daily fix as a tool to manage depreciation pressure.

Nonetheless, the currency’s weakness early in 2016 also elevates the significance of the next set of data concerning China’s foreign exchange reserve growth, released starting later this week. The outsized currency moves raise new questions within markets about the appetite for sustained intervention within the PBOC and the Chinese leadership, and a sharper drop in foreign reserves would further bolster expectations of a more significant depreciation in the currency. In addition, the widening of the spread between the offshore and onshore currencies continues to limit the PBOC’s options in managing the exchange rate.

Posted August 1, 2017
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