Jumping into the worldwide markets is a way to reduce the spread between the officially set onshore rates and the trader-affected ones, a key metric that influences the currency’s overall momentum.
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“The market has basically stabilised after the tumble and investors are waiting for further policies that will boost sentiment”.
As of the end of 2015, the CFETS exchange rate composite index, which measures the yuan’s strength relative to a basket of 13 foreign currencies, stood at 100.94, up 0.94 percent from the end of previous year.
“The lower yuan fixing probably signifies greater risks to the Chinese economy than we know of, leading to risk-off trades”, said Jeremy Stretch, head of currency strategy at CIBC World Markets. It has also created concerns that China’s neighbours will be forced to engage in their own competitive devaluation to keep their exports competitive, worsening regional instability.
All eyes will be on the yuan and the Chinese markets today.
The drop was the biggest since August when the value was cut by 5% over a week – a move that sparked weeks of turmoil across global markets over worries Beijing was did not have a handle on its economic crisis.
The losses came after the US Department of Energy said gasoline stockpiles jumped 10.6 million barrels and distillates, including diesel and heating fuel, rose by 6.3 million.
In the wake of Thursday’s selloff, the China Securities Regulatory Commission (CSRC), the public body in charge of regulating China’s economy, made a decision to suspend the system. The Australian dollar, often used as a liquid proxy for the yuan, fell half a USA cent in a blink.
That, in turn, can ripple through to the global markets.
“The PBOC is intervening, there are a lot of capital outflows, and the yuan is facing larger depreciation pressure”, Chen Xingdong, a Beijing-based chief China economist at BNP Paribas SA, told Bloomberg.
It also makes commodities denominated in US dollars more expensive for Chinese buyers, which could hurt demand and thus further depress commodity prices in a vicious chain reaction. As in August past year, the trigger is a sudden slide in the value of the yuan, which in turn has dragged down domestic stocks.
Japan’s Nikkei, which is in its worst start of year in 20 years, fell 1 per cent to a three-month low and is likely to post its biggest weekly fall since March 2011.
The halt mechanism, meant to calm market volatility, was having the opposite effect, according to a 22-year-old retail investor in Guangzhou surnamed Hu.
Equally, dealers are uncertain how Chinese equity investors will react to the abolition of the circuit breaker.
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A visitor waits for the New Year opening ceremony at the Tokyo Stock Exchange (TSE), held to wish for the success of Japan’s stock market, in Tokyo, Japan, January 4, 2016.
