The Yuan market is stabilizing after a historic week of currency regime shifts and biggest selloffs in two decades.
China's foreign market exchange rate has converged with its official reference rate since Thursday, after being consistently traded at more than one percent weaker over the past few months, states Bloomberg. Experts from RBC Capital Markets indicated that the change may be a sign that policy adjustments enforced by the Chinese authorities is working and nearing its goal, with the exchange rate less likely to have volatile market movements going forward.
The Bloomberg report also mentioned how the People's Bank of China (PBOC) cut the fixing by 1.9 percent last Tuesday, August 11, which also marked the biggest decline since 1994. The cut was an attempt to align the official and market rates, given the central bank's move to a new regime wherein it gives supply and demand more flexibility in deciding its foreign exchange rate. This reportedly resulted to a decline in investor expectations for swings in the yuan market. Last Friday, August 14, the three month implied volatility for offshore yuan fell to 5.4 percent. This is down from the 7.8 percent previously recorded by Bloomberg since it started compiling the data in 2011. The gauge also reportedly doubled from earlier this month.
In a press conference held Thursday, August 13, the PBOC Deputy Governor Yi Gang said that the current exchange rate is "more consistent with economic fundamentals and there is no need to adjust it to boost exports," reports the Business News. The central bank's new system in setting the daily fixing will require the market makers, who submit contributing prices, to look at several factor which includes the previous day's close, foreign-exchange demand and supply, as well as changes in major currency rates. The PBOC executive stated, "The nation has no intention, nor needs to be involved in a currency war and the driver of future economic recovery is expected to come from domestic consumption."
In the report, Business News also cited how several countries that exports commodities to China such as Brazil, Australia, Canada and South Africa have experienced the most depreciation this year given the multi-low prices of oil, nickel, aluminum and zinc. It comes as no surprise, states the site, that China's economy suffered since the yuan has appreciated against the dollar while others have sharply weakened. However, Chinese authorities were quick to defend their move and added that the recent policy change will enable the china market to shift to a more "market oriented" and transparent system in setting exchange rates.
