FX MONETARY POLICY
The recent PBoC intervention is to change the ‘one way’ mindset, shake out speculators and introduce some volatility
Xi Jinping is making a concrete attempt to rebalance the economy and create a more sustainable growth
Te risk is that a controlled depreciation could morph into uncontrolled capital outflows
by Alessandro Balsotti WHAT’S GOING YUAN?
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” Mark Twain
The Workings of Chinese Currency management
First, a quick reminder of how Chinese currency management works. Since 2005, the PBoC (China’s central bank) has been managing the CNY gradually upward against the US dollar, at an annual rate of about 5% a year through the end of 2011 (except for a hiatus during the global financial crisis), and a slower pace of around 2-3% since 2012. Te CNY was allowed to trade
18 FX TRADER MAGAZINE April - June 2014
1% below or above a “central parity rate” which is set daily by the PBoC (a measure which has been widened in the years from an initial 0.3%). From September 2012 until a week ago, the spot CNY rate continuously traded above the parity rate—usually, quite close to the 1% limit. Tis limit-up trading reflected the view that the CNY was a one-way appreciation bet.
Ten, recently, a couple of notable things have happened.
• From the end of January the central bank has started to become more aggressive in his market intervention, bringing the daily fixing at levels of increasingly weaker levels for the Yuan. Te overall movement has been of almost 3% from the lows with the market now trading well above mid- band, while before it was typically resting on the lower limit of the USD/CNY price.
• On the 15th of March the floating band has been widened from 2% to 4% (2% each side of the daily central parity).
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