PBOC is expected to set the USD/CNY reference rate at 7.2758 – Reuters estimate

People’s Bank of China USD/CNY reference rate is due around 0115 GMT.

I mentioned above the ‘CCF’, this is the People’s Bank of China’s “counter-cyclical factor”

  • The PBOC introduced the “counter-cyclical factor” as a tool within its exchange rate mechanism in 2017.
  • This was done with the intent of reducing potential volatility and curbing one-way speculation on the Chinese yuan (CNY or RMB).

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  • Prior to this, the daily central parity rate of the RMB against the U.S. dollar (and other major currencies) was based on the closing rate of the previous trading day, supply and demand in the interbank foreign exchange market, and changes in major international currency exchange rates.

In 2017, the PBOC modified its methodology by introducing the counter-cyclical factor. This adjustment was designed to counteract the effects of pro-cyclical behaviors in the foreign exchange market.

  • Pro-cyclical behaviors refer to market actions that amplify currency trends. For example, if the RMB is depreciating, market sentiment and herd behavior could lead to more selling of the RMB, accelerating its depreciation. Similarly, if the RMB is appreciating, pro-cyclical behaviors could spur more buying, pushing the RMB to appreciate even faster.
  • The Counter-cyclical factor tool allows the PBOC to intervene and moderate those market forces. By adding this factor to the formula, the PBOC can adjust the daily fixing in a direction opposite to market sentiment. For instance, if the market is pushing the RMB to depreciate too quickly, the counter-cyclical factor can be used to set a higher-than-expected fixing, thereby countering the excessive downward pressure.

The mechanism aims to fend off one-way speculative behaviors by adding an element of unpredictability to the fixing. In this cycle the PBOC has been using the CCF to slow the fall of the yuan, but the continued aggressive mid-rates, locked on 7.17 despite the open market trading much higher, seems to imply the Bank want the yuan to now gain in value.

Pan Gongsheng is People’s Bank of China governor

This article was written by Eamonn Sheridan at www.forexlive.com. Source