Key Points:
- PBOC changes the fixing process for the Renminbi.
- Move has stabilised the Renminbi and may lead to appreciation.
- USDCNY has fallen to the lowest level since early 2017.
In a move that is likely to please the Trump administration, the Chinese government has taken action to revalue the Renminbi and subsequently sent the USDCNY pair tumbling. Last week saw the Peoples Bank of China (PBOC) adding some additional factors into the model which determines the Yuan’s daily fixing rate with the ultimately aim of further stabilising the currency. This is likely to be seen as a welcome move from the central bank given the sharp selloff in the Yuan over the past year.
However, there are some negatives to the move with many market participants criticizing the lack of a free market driven valuation and suggesting that the latest move simply again pushes towards full government control. Subsequently, although the fixing alteration certainly takes immediate moves to stabilise the currency it does so in an artificial way, especially for a currency which has recently been added to the reserve basket of currencies.
The reality is that the changing of the fixing factors is largely strategic with the currently depressed value of the greenback providing a unique opportunity to add a “cushion” for when the USD roars again. In addition, the domestic slowdown in China has largely meant that currency outflows have reduced significantly and might help to increase expectations around an appreciation in the value of the Yuan. Subsequently, the timing shouldn’t really be of surprise to anyone given that the depressed state of the greenback provided the central bank with a very unique window of opportunity.
Ultimately, the move is likely to further relive the PBOC of the pressures of capital outflows and might help to actually reduce the political pressure on the nation to not be seen as a “currency manipulator”. However, this comes at the risk of the Renminbi being seen as government controlled rather than market driven which is a strange situation for a reserve currency to be in. Regardless, the move is likely to stabilise the Yuan in the medium term and we might actually see some appreciation over the coming month.
