Analysts at JP Morgan remain bearish on the RMB:
- “The fundamental case for additional yuan weakness remains very much intact.”
- “We see the dollar-yuan uptrend as durable, but recent events are a reminder that authorities will periodically try to disrupt one way moves.”
The ‘recent events’ JPM refer to centre on the People’s Bank of China setting the reference rate for USD/CNY much lower than models expect. This was yesterday, for example:
The PBOC is not standing in the way of a weaker yuan, they are however trying to slow the pace of the drop.
The yuan is not a freely floating currency. Its subject to PBOC intervention, in the form of this daily setting, every single trading day.
I do remind of this every treading day also:
The People’s Bank of China (PBOC), China’s central bank, is responsible for setting the daily midpoint of the yuan (also known as renminbi or RMB). The PBOC follows a managed floating exchange rate system that allows the value of the yuan to fluctuate within a certain range, called a “band,” around a central reference rate, or “midpoint.” It’s currently at +/- 2% and some think it could widen to 3% this year.
How the process works:
- Daily midpoint setting: Each morning, the PBOC sets a midpoint for the yuan against a basket of currencies, primarily the US dollar. The central bank takes into account factors such as market supply and demand, economic indicators, and international currency market fluctuations. The midpoint serves as a reference point for that day’s trading.
- The trading band: The PBOC allows the yuan to move within a specified range around the midpoint. The trading band is set at +/- 2%, meaning the yuan could appreciate or depreciate by a maximum of 2% from the midpoint during a single trading day. This range is subject to change by the PBOC based on economic conditions and policy objectives.
- Intervention: If the yuan’s value approaches the limit of the trading band or experiences excessive volatility, the PBOC may intervene in the foreign exchange market by buying or selling the yuan to stabilize its value. This helps maintain a controlled and gradual adjustment of the currency’s value.
This article was written by Eamonn Sheridan at www.forexlive.com. Source