Market News

Chinese Yuan update - market still confused over PBOC fixing mechanism

 
 

Last Friday, the People's Bank of China (PBOC) released its quarterly monetary policy report, in which the central bank tried to expand on and better explain the relatively mysterious factor it added to its daily currence reference rate back in May, 2017.

Since the adjustment, traders across the world have been puzzled by the PBOC's counter-cyclical mechanism, which according the bank, was added to make the foreign exchange rate regime more transparent, better regulated and more oriented toward the global market. 

However, news bureau Reuters reported today that market voices have been raised, expressing concerns that they still view it difficult to understand the new fixing mechanism, finding it even harder than before to make market predictions for the yuan's next moves. 

Last year, the Chinese currency dropped 6.5% against the U.S. dollar. However, since May and the PBOC rate refrence adjustment was adopted to combat and decrease volatility, the yuan is up more than 4%, which is considered unusual for China. However, this morning U.K. time, it eased against the USD and appears on the way to report its first weekly loss since the beginning of July. This follows a three consecutive months of upward development for the yuan. 

The PBOC has remained relatively silent about the adjustment for months, until last Friday's publication of the monetary policy report. The document states that the 14 banks that the PBOC collects daily forecasts from, could now create their own counter-cyclical coefficient based on macroeconomic information and foreign exchange market changes, according to Reuters. 

The news bureau states that instead of one unclear variable, there are now 14 ones, subsequently listing reactions from the financial community. Leading Forex traders do not find the report a sufficient elaboration of the complex PBOC move. Some even call the new fixing mechanism a transparency and credibility throwback. 

"The 'Mother Central Bank' has gained more control over the fixing. Put another way: she still has the final say," a Shanghai-based Chinese bank trader told the reporters. 

 

The PBOC was founded in 1948 and is the central bank of the People's Republic of China. Under the leadership of president Zhou Xiaochuan, it carries out monetary policy and regulates banks in China.