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PBOC verbal intervention soothes markets, says no further devaluation

The Chinese yuan moved lower for a third consecutive day on Thursday but was more stable compared to the more aggressive and quick moves in the past two days. The People’s Bank of China (PBOC) set the reference rate between the US dollar and the yuan at 6.4010. The prior fix on Wednesday was at 6.3306. The yuan saw the biggest fall on Tuesday of almost 2% when the central bank raised the midpoint from 6.1162 to 6.2298, roiling markets as this move was taken as a sign that the world’s second largest economy was struggling, following a recent batch of poor economic data.

Markets were a little calmer on Thursday after some verbal intervention from the PBOC which said there was no basis for further depreciation. In an official announcement earlier today, the central bank reassured markets that the strong economic environment in China along with a sustained trade surplus, a sound fiscal position and deep foreign exchange reserves all provided “strong support” to the yuan exchange rate.

These comments soothed the markets as the PBOC signaled that they have a more orderly plan in place with regards to its currency exchange rate. PBOC Governor Yi Gang said at a press conference on Thursday that the Bank would conduct “effective management” of the yuan in cases of extreme volatility.
While the Chinese government has taken other measures in the past to stimulate the flagging local economy, namely by cutting rates four times since November and trimming bank reserve requirements, the PBOC today dismissed suggestions that the government could allow the yuan to fall 10 percent in order to support struggling exporters.

This week’s move in the yuan exchange rate was large for a daily change but did not take the rate outside the recent trading range and such a relatively small devaluation won’t have large enough impact to jumpstart the economy. Central bank officials indicated that China is moving to revamp its currency regime to have a more flexible yuan. This would help make the PBOC’s monetary policy more independent and effective.

Meanwhile, the International Monetary Fund believes that China’s move appeared to be part of reforms to internationalize the yuan and make it a more market-determined exchange rate. China may be attempting to join the IMF’s currency basket of Special Drawing Rights (SDRs), which are used to supplement member countries official reserves.

While the yuan is the world’s fifth most used currency, it has not been able to join the elite forex club alongside the US dollar, British pound, euro or Japanese yen because it is not considered a freely traded currency and as a result does not meet the IMF’s SDR criteria.

Risk sentiment was back on slightly today and was more evident in emerging market currencies, which bounced back after Wednesday’s tumble. The US dollar was also firmer, recovering losses against the yen, to trade up to 124.58 by mid-European session from yesterday’s low of 123.78 yen.

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