SHANGHAI, Apr 16: The yuan set yet another record high against the dollar for the third straight day on Tuesday after the central bank set an unusually high midpoint, in defiance of a dollar index that also rose in overnight trade.
Traders originally attributed the central bank’s aggressive midpoint settings to a visit by U.S. Secretary of State John Kerry, but Kerry has since left China and yet the People’s Bank of China continues to signal permission for the market to scale fresh heights.
Ordinarily the central bank sets the midpoint inversely to overnight moves in the dollar index to keep the rate stable, but the midpoint rose on Tuesday even though the dollar index also climbed overnight.
The move also flies in the face of predictions that Beijing would devalue the yuan alongside the Japanese yen after the Japanese government embarked on an economic stimulus programme that saw the yen lose nearly a quarter of its value against the dollar in the past six months.
Some traders theorized that the strong midpoint settings are intended as a gesture at recent pessimistic moves by foreign ratings agencies questioning China’s management of its local debt.
Intraday volatility in the yuan spot market is controlled by the central bank’s daily midpoint setting. The exchange rate is only allowed to diverge from the midpoint by 1 percent in either direction, making the midpoint setting in the morning the signal of how much appreciation or depreciation regulators are willing to permit. In the past the bank has used the midpoint to leash the market when it felt that corporates were being too optimistic or pessimistic about the future value of the yuan.
In recent weeks, however, the central bank has repeatedly set the midpoint at record highs against the dollar, which has allowed the spot market to take advantage of the new range to set new records as well.
China has seen a dramatic resurgence of hot money inflows from overseas markets in recent months, which has complicated its monetary policy and made China’s exports more expensive.
The onshore spot yuan market at a glance:
Item Current Previous Change PBOC midpoint 6.2408 6.2454 +0.07% Spot yuan 6.1842 6.1871 +0.05% Divergence from midpoint* -0.91% Spot change ytd
+0.69% Spot change since 2005 revaluation
+33.77%
*Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. The People’s Bank of China (PBOC) allows the exchange rate to rise or fall 1 percent from the official midpoint rate it sets each morning.
(AGENCIES)
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