The Chinese yuan hit its lowest level against
the dollar since July 2011 on Friday amid signs that the Chinese
authorities are keen both to weaken the currency to improve
competitiveness and to divert attention away from the dollar/yuan
exchange rate towards a broader currency basket.
In a
statement on the People’s Bank of China website,
the central bank announced on Friday that it is introducing an exchange
rate index which, it hopes “will help bring about a shift in how the
public and the market observe RMB exchange rate movements”. The RMB, or
renminbi, is an alternative name for the yuan.
“The People’s Bank has just announced what could end up being a
significant shift in currency policy,” writes Mark Williams, chief China
economist at Capital Economics.
“The fixation on the dollar spot rate has put the PBOC in a difficult
position in the past couple of years. Because of the link to the
strengthening dollar, the renminbi has appreciated significantly in
trade-weighted terms. Yet any sustained weakness in the renminbi
relative to the dollar tends to be interpreted as ‘devaluation’ and
trigger market concerns. The timing of this announcement is significant,
on the cusp of tightening by the Fed, which could feed further dollar
strength,” he adds.
Late in the European day on Friday, the dollar was up another 0.3% at
6.4538 yuan, its highest level for more than four years, as analysts
speculated that an increase by the Federal Reserve in US interest rates
next Wednesday is a near certainty.
“The world will be watching the renminbi more
closely than usual over the days ahead. It has weakened against the
dollar in recent trading. If the renminbi does continue to weaken, the
key point is that this should not automatically be interpreted as
devaluation or even depreciation if it is happening against a backdrop
of dollar strength. The renminbi has lost ground relative to the dollar
this year, but the PBOC says that it has appreciated 2.9% relative to
the new basket,” writes Williams.
An important consideration in the weakness of the yuan against the
dollar appears to be the anticipated Fed rate hike next week, writes
Marc Chandler and his global currency strategy team at Brown Brothers
Harriman.
“The PBOC still is in an easing mode. As the monetary cycles diverge,
the tight relationship between the yuan and the dollar poses a
challenge. However, it is important to keep in mind the magnitude of the
moves we are talking about. The yuan has fallen about 0.8% this week.
Year-to-date, it has depreciated by about 3.8%, making it the fourth
best Asian currency performer this year, behind the Hong Kong dollar
(pegged), Japanese yen (-1.6%) and Taiwanese dollar (-3.6%),” they add.
Analysts say further depreciation of the yuan remains highly likely
as the Chinese authorities seek to boost economic growth and avoid
capital outflows by making Chinese exports more competitive. This
weekend, more Chinese data on fixed-asset investment, industrial
production and retail sales should help make it clearer how successful
they are being.
“Fixed investment growth probably picked up further in November in
response to policy easing; similarly industrial output should also have
recovered. And a tight labour market suggests retail sales growth is
likely to have remained healthy too,” writes Capital Economics.
This post was first published by news.markets:
http://news.markets/forex/china-introduces-currency-index-yuan-hits-four-year-dollar-low-6656/
