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China: Changing the perception towards RMB exchange rate movements – Deutsche Bank

FXStreet (Delhi) – Research Team at Deutsche Bank, notes that the PBoC published its new trade weighted exchange rate index for the Renminbi.

Key Quotes

“The statement released said that the intention of this is to 'shift how the public and the market observe the RMB exchange rate movements' and that in their view 'the bilateral RMB/USD exchange rate is not considered a good indicator of the international parity of tradable goods'. The statement goes on to say that it would be more appropriate to measure the performance of the RMB against both the US Dollar and also the basket of trade weighted currencies.”

“They expect the new basket of currencies to be a more explicit reference in setting the value of the RMB in the future and believe that this move implies that, if the US Dollar appreciates against some other currencies, the PBoC will likely tolerate some depreciation of the RMB against the US Dollar as long as its value against the basket of currencies remains stable.”

“Most importantly, they see this as a signal that China does not intend to engage in competitive devaluation. That is, the RMB is actually likely to appreciate against the other EM currencies if the US Dollar strengthens globally. There will be some with more negative views on this though, viewing it as paving the way for a devaluation as soon as they feel able to justify it. At least now the market is being better prepared for the scenario than it was in August.”

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