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FX FUNDAMENTAL ANALYSIS China’s central bank decided to


declare its “counter-cyclical” support for the yuan. CFETS describes itself a “sub-institution directly affiliated to the (PBOC).”


Trading opened the following Monday on a positive note as CFETS strengthened its central parity rate by 202 basis


points, or


hundredths of a percentage point, against the dollar, t emp o ra r i ly halting the weakening trend. But there was little explanation of the agency’s “counter-cyclical” measure, which has been used only once before, in May 2017 to moderate mo v e me n t s “driven by irrational sentiment in the foreign exchange market.”


cry from freely floating exchange rate policies as practiced in most advanced economies.


“Even though the latest measure could help stabilize the yuan in the near


Exchange rate reforms


“The central bank will try to fight whichever direction


market forces currency”


Te PBOC “has never explained what exactly it means by the policy,” said the CNBC financial network. “Many understand the term to mean the central bank will try to fight whichever direction market forces are pulling the currency,” it said. At least one thing seems clear from China’s references to the “counter-cyclical” tactic. It is a far


42 FX TRADER MAGAZINE October - December 2018


term, the policy shiſt means Beijing, once again, is backtracking on its efforts to make the yuan more market- driven,” said Te Wall Street Journal. “To be blunt, the counter-cyclical factor appears to be nothing more than a black box that prevents calculation of how the yuan rate is fixed based on the procedure specified by the PBOC,” said Commerzbank senior economist Hao Zhou, writing in the South China Morning Post.


are pulling the


Te latest defense of the yuan comes three years aſter the PBOC introduced its current version of exchange rate reforms. In August 2015, the PBOC adopted the policy for its “market-based, managed floating exchange rate system,” which allows the yuan to vary by two percent against the dollar from a “central parity rate” issued daily. Te parity rate, or midpoint, “is based on a weighted average of prices offered by market makers before the opening of the interbank market each business day,” according Xinhua’s daily


exchange rate report.


Who are these “market makers?” Te CFETS statement on the “counter- cyclical” factor makes it clear. In the Aug. 24 statement quoted by Xinhua, CFETS explained that “most of the foreign exchange (forex) market-making banks have made the adjustment on their own initiative since the beginning of August to offset procyclical sentiment amid a


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