The PBOC have all but declared their intentions – we’re going to see a gradual widening of the FX band, and further liberalisation of capital controls and the interbank market. Gold has risen from $1,085 to $1,117. The flight to safety in equity and bond markets seems wrong-headed.
Advertisement
The Chinese currency continued its sharp fall for a third consecutive day on Thursday after the central bank reformed the exchange rate formation system.
The USD/CNY can then trade plus or minus 2% around this mid point. The PBoC’s penchant for doing things piecemeal appears to have confused the market. This is a fundamental factor in determining the supply and demand of foreign exchange, and is also an important foundation to support the RMB exchange rate.
Deflation, by definition, is an increase in the value of a currency against goods (and, relatively speaking, other currencies). However, data released overnight (a big miss in China July Industrial Output and multi-year low in Fixed Asset Investment) suggests that the PBoC’s actions are somewhat justified, for now.
The press is full of reports that China’s RMB devaluation is a sign of economic slowing.
“The depreciation is limited so far compared with some other large emerging markets – Brazil’s and Russia’s currencies have depreciated by 35 percent and 45 percent versus the dollar over the past year“. “That’s why it is too early to declare a currency war”.
For the past couple of years, China has been grappling with a slowdown in its economy.
It’s high time that the PBoC lets the dollar peg go.
Elsewhere, Australian shares were down, with the S&P/ASX 200 index closing 0.6% lower at 5,356.54 points. That would directly help to offset the 7.3% contraction in Chinese foreign trade recorded for the first seven months of 2015, in which imports slumped by almost 15% while exports fell 1% from comparable periods in 2014.
The depreciation of the Chinese yuan by over 3% against the US dollar since 11 August underscores both the pressure on China’s economy and that the authorities remain committed to market-oriented reform, says Fitch Ratings.
The move came a day after the PBoC surprised markets by devaluing the renminbi by almost 2 per cent. After yesterday’s move, the renminbi sank as low as 6.44 in onshore markets, its weakest level since 2011. It’s the yuan’s weakest fixing level since October 2012.
China’s move is a signal to the Fed that monetary tightening is a bad idea in a very weak economy.
Advertisement
Will the central parity of RMB against US dollar converge to the equilibrium market rate?
