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USDCNH Declines after PBOC Cuts Reference Rate for a Second Day

USDCNH Declines after PBOC Cuts Reference Rate for a Second Day

Daniel Dubrovsky, Senior Strategist

Talking Points:

  • USDCNH declines more than 2.6 percent in morning trade
  • PBOC lowers the Yuan reference rate for a second day
  • AUDUSD fell more than 1.2 percent to a fresh 6-year low

The Offshore Chinese Yuan fell more than 2.6 percent versus its US counterpart (USDCNH) in morning trade. The move lower came after the People’s Bank of China unexpectedly lowered the Yuan reference rate by 1.6 percent for a second consecutive day. Yesterday’s cut was 1.9 percent.

From Tuesday, the PBOC said that the decline in the reference rate was a one-off adjustment because the Yuan effective exchange rate had become unduly strong. After Wednesday’s cut, the PBOC said that the currency will not continuously devalueand that the move of the Yuan reference rate is normal. The central bank added that there is no economic basis for the Yuan’s constant devaluation.

On the sidelines, the International Monetary Fund (IMF) remarked on PBOC’s actions. The fund said that the new mechanism for central parity is a welcoming step. The announced changes from PBOC will have no direct implications for the criteria used in determining the composition of the Special Drawing Rights (SDR). It also said China should aim to have an effectively floating exchange rate system within 2-3 years.

Once again, a spillover effect can be seen in the AUDUSD exchange rate, which fell more than 1.2 percent after the PBOC announcement to hit a new six-year low. In its quarterly monetary policy statement, the RBA said that risks from China are tilted to the downside. Weakening the Yuan will make goods from Australia more expensive in China, the former country’s top trading partner. This may weigh on growth and push the RBA cut interest rates further. Indeed, Australian 2-year government bond yields sank alongside the upward jump in USDCNH, linking the PBOC’s announcement to building RBA easing speculation.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.