FUNDAMENTAL ANALYSIS


FX


China declares “counter-cyclical” support for the yuan


China’s central bank has announced support measures for the country’s sagging currency, but in the process, it may have highlighted the machinations behind its self-styled reforms.


On Aug. 24, the China Foreign Exchange Trade System (CFETS) announced the reintroduction of a “counter-cyclical” factor in adjusting the value of the yuan renminbi (RMB) against the U.S. dollar to resist further depreciation. CFETS cited a “soſtening trend” and “lingering market expectations of continued slips”, the official Xinhua news agency said. Te regulators took action following a five-percent plunge over a two-


month period as the currency came perilously close to dropping through the psychological barrier of seven yuan to the dollar. Te currency hit a high of 6.2 to the dollar in February this year.


International pressures have ganged- up against the yuan in recent months with a potent combination of a strong dollar, rising U.S. interest rates, cooling economic growth and tariff concerns. Te CFETS move at the close of a


rough trading week came one day aſter a Chinese delegation ended talks in Washington with no sign of progress in the tariff dispute.


Tree weeks earlier, the People’s Bank of China (PBOC) imposed a 20-percent reserve requirement on foreign exchange forward contracts to discourage short-selling of the yuan, but the value continued to fall. Faced with further downward pressure,


FX TRADER MAGAZINE October - December 2018 41


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