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China’s currency policy back with a bang - MUFG

FXStreet (Delhi) – Lee Hardman, Currency Analyst at MUFG, notes that the US dollar has continued to strengthen against Asian currencies ahead of this week’s FOMC meeting at which the Fed is expected to begin gradually lifting interest rates for the first time since June 2006.

Key Quotes

“Renewed weakness in the renminbi is encouraging broader selling pressure on Asian currencies in the near-term resulting in the Asian dollar index declining to a new cyclical low. The PBoC have set the daily fixing rate for USD/CNY higher for the sixth consecutive day amidst building investor expectations that the Chinese authorities are willing to tolerate a weaker renminbi at least against the US dollar. Renewed weakness in the renminbi suggests as well that the PBoC have been intervening less actively recently to provide support.”

“Investor expectations for further renminbi weakness against the US dollar have been reinforced by an article published on the PBoC’s website written by an unidentified commentator at China’s Foreign Exchange Trade System Website. The article announced the release of a new basket measure of the renminbi measured against thirteen other currencies. The weightings of the new basket were revealed providing greater transparency. The US dollar’s weighting was set at 26.4%, the euro at 21.4%, and the yen at 14.7%.”

“The article states as well that it is more desirable to refer to both the bilateral USD/CNY exchange rate and the exchange rate based on a basket of currencies. The article has encouraged speculation that the PBoC is signalling that it is moving towards targeting the renminbi against a basket of currencies in the future, although there is no definitive statement that will be case. At the very least the PBoC want to reduce the market’s focus from relying on the USD/CNY rate when assessing exchange rate performance.”

“The article also draws the market’s attention to the observation that the renminbi has been basically stable this year against several baskets of currencies which is consistent with their desire to maintain the renminbi basically stable at a reasonable and balanced level. It suggests that the renminbi will likely weaken further against the US dollar should it continue to strengthen broadly which would help to maintain greater stability renminbi against a basket of currencies and vice versa.”

“Overall it should encourage greater flexibility for the renminbi potentially helping to smooth the transition to a flexible exchange rate. However, there is no clear signal that the PBoC want to weaken renminbi against either the US dollar or a basket of currencies.”

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