CHART OF THE WEEK
As China’s markets reopened following its Golden Week holiday, on Monday October 10th the People’s Bank of China (PBoC) fixed the midpoint around which the USD/CNY can trade at 6.7008. This is the first time in six years that the CNY mid-point has broken the symbolic 6.70 threshold. Following three months of general currency stability, the yuan, which officially belongs to the IMF’s very exclusive reserve-currencies club since October 1st, has begun a downward trend against the USD.
Our Analysis
Recent yuan weakness against the USD has to be seen within the context of the PBoC’s new exchange rate policy, where the CNY mid-point is now set both according to the spot rate from the previous trading day as well as its variation compared to a basket of currencies that includes the USD (26% weighting). Given that the USD has been strengthening across the board, including against the yuan, there has been downward bias on the CNY fixing and the CNY/USD pair. Thus, recent yuan weakness is not a cause for concern as it mainly reflects a stronger greenback rather than any factors specific to China. Indeed, after an overall 6% drop in value since 2015, the yuan has recently strengthened slightly against the PBoC’s basket of thirteen currencies. The yuan’s 50% appreciation in real terms between 2005 and 2015 also helps to put this recent weakness into perspective.
The opinion expressed above is dated October 14th, 2016 and is liable to change
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