China cut the reference rate for its currency for the third straight day, on Thursday after the surprise devaluation of the yuan this week unsettled global financial markets.
Advertisement
A research note from HSBC also said the new forex policy is part of China’s strategy to liberalize the yuan rather than a tool to support growth.
The spot market opened at 6.3880 and was changing hands at 6.4076 after the PBOC comments, 206 pips weaker than the previous day’s close and only 0.1% away from the guidance point, the closest it has traded to the guidance rate since November 2014. A depreciation of the currency of 3 percent will provide a jolt to Chinese exporters, but will slam companies and countries that export to China.
The peso tumbled to a five-year low of 46.26 against the US dollar Wednesday in a knee-jerk reaction before recovering to 46.15 Thursday.
On Friday, the People’s Bank of China set the yuan midpoint at 6.3975 yuan to the dollar, slightly stronger than Thursday but marking a record weekly loss of 2.9 percent against the dollar.
The People’s Bank of China’s fixing strengthened 0.05 percent, after slides of at least 1.1 percent in each of the last three days.
The yuan’s fall could complicate matters for the European Central Bank in the quarters ahead, Standard & Poor’s economists said in a report Friday.
The Taiwan dollar is faced with downside risks at a time when the Chinese yuan is expected to continue a downtrend after a recent sharp fall against the U.S. dollar, according to Swiss banking group UBS.
The shock has not yet worn off as the markets attempt to find an appropriate trading level for the yuan, which is also known as the renmimbi.
It could also restrain U.S. economic growth, as American exports to China take a hit, which may get the U.S. Federal Reserve to think twice about hiking interest rates in September, Beauchamp said.
China adopted a more market-oriented method of calculating the currency rate this week in a move widely seen as a devaluation, raising fresh questions about the health of the world’s second-largest economy.
“The rates from some foreign institutions are very important, some big commercial banks in the foreign exchange market are our market makers”.
However, in reality the central bank will intervene in the market to keep some control over the exchange rate.
Advertisement
The worldwide Monetary Fund (IMF) described the new policy as “a welcome step” that allows market forces to have a greater say in forming the exchange rate.
