FX Roundup: Yuan volatility settles as dollar firms up
China reset its guiding rate for the yuan lower for a third consecutive session on Thursday, even though the latest downward revision, of 1% against the dollar, was smaller relative to cuts introduced earlier.
Earlier this week, the People’s Bank of China (PBoC) initiated cuts of 1.9% and 1.6% to the daily reference midpoint for the currency on Tuesday and Wednesday respectively. China’s bid to make the yuan exchange rate more market oriented follows a raft of disappointing economic data.
However, the forex market was calmer as the PBoC also announced overnight that it would commence setting the daily midpoint rate based partly on the previous day's trading. The policy would bring the yuan closer to a free-floating currency.
Emerging market economists at Deutsche Bank noted the depreciation sequence suggests that the PBoC is trying to implement a new forex policy framework that is more market oriented.
“We take this as a positive step forward by the government to promote financial reforms. This is encouraging, as the recent volatility in the equity market and the government's bailout policies have led to concerns if financial reforms will be delayed. It is positive for the economy in the long term. In the short term it is unclear how this framework will be implemented going forward,” they said in a note to clients.
Furthermore, Deutsche Bank economists added the yuan is unlikely to depreciate by more than 10% in the next 12 months. “We believe a single-digit depreciation over 12 months alone is unlikely to have a visible impact on growth. China's exports are to a large extent processing trade. The low value added in domestic contents suggests a small depreciation may not help to boost exports by much,” they concluded.
At the close of Asian trading, a dollar was fetching CNY6.3982, up 0.19%. Other Asian Pacific countries were also trading lower against a firmer dollar with the Australian and New Zealand dollars down 0.38% and 0.91% respectively at 1614BST.
Concurrently, the Hong Kong and Singapore dollars were also marginally lower by 0.03% and 0.06% respectively. Preferred carry trade currency – the Japanese yen – was changing hands with the greenback at JPY124.36, the dollar higher by 0.12%.
The US currency also rose against euro which shed 0.20% against the greenback at $1.1137, while the pound sterling lost 0.15% fetching $1.5590.
Kit Juckes, head of forex at Societe Generale, said, “Plenty of people have noted that the euro has replaced the yen as the main "risk-off" currency, weakening when risk markets rally and rallying when risk sells off. This is also reflected in the better correlation between EUR/USD and US/German longer-dated yield spreads, than with short-term rates.”
However, Juckes opined that US 10-year yields were a better gauge of risk sentiment.
“On this basis, if we have a less "risk-off" day and if the bounce we saw yesterday in US yields carries over through the US data, EUR/USD will probably meander down within its recent range. USD/JPY will probably meander up, too,” he concluded.