Central Banks

The yuan has hit its highest since mid-October 2022 (using its trade-weighted value)

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The CFETS RMB Index (often referred to as the “yuan CFETS Index”) is a trade-weighted currency index published by the China Foreign Exchange Trade System (CFETS). It measures the value of the Chinese yuan (CNY) against a basket of currencies from China’s major trading partners.

While the USD is appreciating globally, weakening the yuan in the USD-CNY pair, other currencies in the basket (like the Euro or Yen) are depreciating more sharply than the yuan. Thus the yuan will appear stronger relative to the basket as a whole than it is against the USD.

  1. Purpose:

    • The index provides a more comprehensive view of the yuan’s exchange rate performance relative to multiple currencies, rather than focusing solely on the U.S. dollar.
    • It reflects China’s efforts to promote a broader and more balanced understanding of the yuan’s value.

  2. Currency Basket:

    • The index is calculated based on a basket of currencies representing China’s key trading partners.
    • The weights assigned to each currency are determined by their share of China’s trade, ensuring the index reflects the importance of each partner in China’s foreign trade.

  3. Adjustments:

    • CFETS regularly reviews and updates the composition and weights of the currency basket to reflect changes in trade patterns and economic conditions.

  4. Usage:

    • The index is used as a benchmark for the yuan’s relative performance and to guide expectations about China’s currency policy.
    • It aids policymakers, analysts, and traders in assessing the yuan’s stability and competitiveness in global trade.

Distinction from USD-CNY Exchange Rate:

While the USD-CNY exchange rate is a bilateral measure showing the yuan’s value against the U.S. dollar, the CFETS RMB Index offers a multilateral perspective, accounting for the yuan’s movements against a broader set of currencies. This makes it a more holistic measure of the yuan’s overall strength or weakness.

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As a ps. CFETS functions as an operational arm of the PBOC, executing and facilitating the central bank’s foreign exchange policies, while also serving as a hub for yuan trading and market transparency. It plays a key role in supporting China’s exchange rate regime and monetary policy objectives.

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