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Renminbi narrowly averts biggest weekly fall since 2015 tumble
Chinese central bank encourages volatility after long appreciation run to deter speculators
PBoC sets Renminbi trading band weaker following five-week low
32 MINUTES AGO by Gabriel Wildau in Shanghai
The renminbi narrowly averted its biggest weekly loss since Beijing triggered a sudden devaluation in August 2015, as China’s central bank encourages greater volatility to keep speculators off guard.
Since hitting its highest level in nearly 21 months earlier this month, the renminbi has weakened by 1.9 per cent. The decline follows the People’s Bank of China’s move to scrap two trading restrictions that had been intended to discourage bearish bets against the currency.
Market participants viewed that move as a signal that the PBoC was less nervous about renminbi weakness following a virtually uninterrupted rally this year. Analysts say that as the threat of sharp depreciation has faded, authorities are more comfortable letting the currency respond to market forces.
“As depreciation expectations have eased, we expect the PBoC to tolerate or even encourage higher renminbi volatility and also ease capital controls,” Larry Hu, China economist at Macquarie in Hong Kong, wrote on Friday.
The renminbi traded weaker for most of Friday and by midday was on course for its worst calendar week since the 2015 devaluation surprise move in August 2015 to unleash pent-up depreciation pressure.
But an afternoon rally helped the currency close 0.2 per cent stronger on the at 6.647 per dollar. Traders said that some banks did not want to carry long dollar positions over the Golden Week holiday, when China’s onshore markets will be closed. Even after the rally, the renminbi posted its first losing month since April.
The central bank’s apparent tolerance for moderate weakening of the renminbi is in line with previous statements that it is more focused on ensuring the currency’s “basic stability” against a trade-weighted basket of currencies than against the dollar.
The US dollar hit a one-month high this week against a basket of global currencies after Fed chair Janet Yellen heightened expectations of another rise in US interest rates in December, sparking broad weakness among emerging market currencies.
The China Foreign Exchange Trading System, an arm of the PBoC, in late 2015 launched an index tracking the renminbi’s value against a custom-weighted basket of currencies. But the central bank’s commitment to targeting the basket has been uneven in practice.
What recent currency movements “seem to indicate is that the authorities are now more committed to managing the renminbi according to CFETS index and are indeed allowing more volatility in the bilateral rate against the dollar,” said Christy Tan, head of Asia markets strategy at National Australia Bank in Hong Kong.
Mr Hu believes that authorities are comfortable with the renminbi fluctuating roughly between 6.4 and 7.0, and will intervene only when the exchange rate approaches either side of that band.
Seasonal factors may also have nudged the renminbi weaker in recent days. A currency trader at a regional Chinese bank in Shanghai cited month-end payments for crude oil imports and quarterly dividend payments by state-owned telecoms operator China Mobile as sources of elevated dollar demand.
“On top of that, there’s also the iPhone8 launch, so Apple is coming out to buy FX to remit sales proceeds,” he added. “The dollar market has been short squeezed.”
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