Charts: the weakness of Chinese Yuan28 June, 2012, 21:33. Posted by Zarathustra
Tags: Chinese Yuan
Recently, the Chinese Yuan has stopped strengthening against the US dollar. Indeed, it has been weakening against the US dollar. We were early in expecting that Chinese Yuan could weaken amid economic slowdown, and the recent moves in USDCNY confirms that it is happening.
What’s interesting when we look at the prices for USDCNY at daily closing and the People’s Bank of China daily fixing is that increasingly Chinese Yuan close at rates much weaker than PBOC’s fixing against the US dollar. That is to say the PBOC fixes the exchange rate at a relatively strong level, and the market sells off Chinese Yuan to a weaker level. The net result is that while Chinese Yuan has been weakening, nothing particularly dramatic has happened.
The chart below shows the gradual weakening of Chinese Yuan against the US dollar. Note that the daily closing for Chinese Yuan is now consistently weaker than PBOC’s fixing.
The chart below shows two things. The red line is the difference between PBOC fixing and the closing price of the previous day. The blue line is the difference between the closing price and the PBOC fixing of the same day. Increasingly, the PBOC sets Chinese Yuan at a stronger rate than the previous day closing, while the closing price turns out to be weaker than the PBOC fixing. In other words, the PBOC has been setting Chinese Yuan consistently above the market price.
Chinese Yuan weakness is also manifested in the offshore market in Hong Kong, with the rate known as USDCNH. Chinese Yuan was consistently traded at a premium in the offshore market compared to onshore Chinese Yuan until September of last year when it was suddenly being traded at a discount as the Euro Crisis escalated around that time. The discount disappeared late last year, but offshore Chinese Yuan is now once again being traded at a discount.
We speculate that because China is under increasing pressure of capital outflow (and because corporate China is short US dollar), the selling pressure of Chinese Yuan could be increasing. However, it has always been somewhat dangerous for any central bank with existing currency peg to signal to the market that it is allowing its currency to weaken (although we believe the PBOC has already done so by widening the trading band) because that tends to exacerbate the problem of capital outflow rather than stopping it. As a result,the PBOC appears to be signalling its desire to keep exchange rate stable by setting the fixing higher than the market price, while the market is doing the opposite thing.