Thursday, the NZ dollar rose 0.19 percent against the yen and 0.64 percent against the euro, as China’s central bank assured markets that it is not trying to continue the depreciation in the yuan, despite lowering the yuan’s reference rate a further 1.1 percent to 6.4010 yuan per dollar.
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China’s yuan gained back some of its strength on Friday, following three straight days of steep falls, as the central bank stepped in to stabilise the currency for the first time since devaluing it on Tuesday. But on Tuesday it moved the fix by 1.9% and said in future that it would base the fix on the previous day’s market rate rather than its own judgement.
The spot rate is now allowed to trade within a range of 2 percent above or below the official fixing on any given day, and had been consistently trading over 1 percent weaker than the midpoint since March.
On the offshore markets, where trading is not restricted by the daily 2% band, the Chinese currency weakened 1.8% to 6.5 – its weakest level in four-and-a-half years.
“The central bank has withdrawn from the normal mode of intervention”, said Yi Gang, head of the unit that runs China’s foreign exchange system.
He added that Beijing’s decision to lower the yuan’s value coincided with the worldwide Monetary Fund’s (IMF) ongoing consideration of including the currency into its so-called basket of supplementary foreign exchange reserve assets.
But the People’s Bank of China took the unusual step of attempting to put a floor under the currency’s decline at a press conference.
“With the suggestion that the PBOC’s currency adjustment is mostly complete at this point right now, one has to think that a September Fed hike is still on the table”, said Mazen Issa, senior currency strategist at TD Securities in New York.
The yuan closed at 6.3912 on Friday, strengthening slightly from Thursday’s close of 6.3982.
The market reacted with surprise as the falling yuan led to a heavy sell-off in regional currencies, declines in Asian stocks and downward bulk commodities prices, as well as claims that the depreciation of the yuan was being engineered by China to rescue sluggish exports. The new exchange rate policy also tallies with the long-standing pledge by China’s leaders to let supply and demand play a “decisive role” in the economy.
Asian markets were mixed on Thursday, but China’s benchmark Shanghai index was up 0.74 percent by mid-morning.
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But he said the PBoC will exercise “effective management” in case of large fluctuations and dismissed rumours that officials had set a target for a 10 percent depreciation in the yuan to spur exports.
