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Chinese Yuan declines as PBOC lowers Yuan Reference Rate 1.1 Percent

Chinese Yuan declines as PBOC lowers Yuan Reference Rate 1.1 Percent

Daniel Dubrovsky, Senior Strategist

Talking Points:

  • USDCNH rose more than 0.4 percent in morning trade
  • PBOC lowers the Yuan reference rate by 1.1 percent
  • Markets start to settle down as PBOC adjustments moderate

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The Chinese Yuan fell more than 0.4 percent against its US counterpart (USDCNH) in morning trade Thursday. The movement lower came after the People’s Bank of China (PBOC) lowered the Yuan reference rate for a third day. The most recent adjustment, a 1.1 percent depreciation, brought the Yuan reference rate to 6.4010 against the US Dollar. Yesterday’s cut was 1.6 percent with the USDCNH rising more than 2.6 percent. Tuesday’s reduction was 1.9 percent with the market-based exchange rate rising more than 1.2 percent.

After the announced adjustment, the PBoC released commentary. The central bank said that it will continue to keep the Yuan stable at a reasonable, equilibrium level. That said, the aim is to have the markets determine the Yuan effective exchange rate. The central bank will step in when it considers the market ‘distorted’. In the long-run, the Yuan is expected to be a strong currency as it enters an appreciation path in the future. In addition, the PBOC said that the Yuan exchange rate adjustment is almost complete.

Looking at overnight S&P 500 trade (in CFDs and futures), the market’s response to China’s new policy has swelled and subsequently moderated the past three days. On Tuesday, S&P 500 futures declined more than 1 percent by the end of the day’s trading session. On Wednesday, the same equity benchmark fell more than 1.6 percent though the morning’s trough. However, by the end of the trading session, it ultimately closed the day higher by 0.2 percent. After the PBoC cut its Yuan reference rate on Thursday, S&P 500 futures were left little changed likely due to the market’s absorbing the implications of the new policy approach. After the PBoC opined the Yuan changes were almost complete, the S&P 500 climbed more than 0.2 percent.

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