The people’s Bank of China (PBoC) set the midpoint for yuan against the dollar at 6.4589 on Friday – a 0.6 percent increment that marked the biggest since July 2005, when the fixing was removed. The central bank responded to an overnight fall of the dollar after the Bank of Japan’s decision to keep monetary policy unchanged while waiting to monitor the effects of already implemented negative rate.
The move by PBoC was part of the apex bank’s aim to set the currency reference rate in line with the offshore exchange rate. Prior to the decision, offshore yuan appreciated 0.3 percent on Thursday to 6.4834.
“The offshore yuan’s reaction is muted, so it seems the market was already expecting a much stronger fixing,” said Ken Cheung, a currency strategist at Mizuho Bank Ltd. in Hong Kong. “This is a reaction to the dollar weakness overnight, and there’s not much in the way of policy intention to read into.”
On Friday, the dollar plunged further against the yen reaching 107.57, its lowest since October 2014. The currency also weakened against other currencies, bringing its total decline on the dollar index this week to over 1.5 percent.
“The fixing is no surprise, the expectation for a stronger yuan fix was laid by the gains for the yen after the Bank of Japan announcement yesterday,” said Patrick Bennett, a strategist at Canadian Imperial Bank of Commerce in Hong Kong told Bloomberg. “The trade-weighted basket continues to depreciate, albeit at a modest pace. But the key to the lower trade-weighted rate does not really lie with the PBOC, rather it is the dollar weakness against other major currencies which is the main driver.”
On 11th August last year, when the PBoC first devalued its currency by 2 percent that triggered a global sell-off and loss of over $4 trillion from global equities. The central bank said it would allow market forces determine its currency value henceforth, while setting the yuan’s spot rate.
The more reason why the apex bank allows the yuan movement — fall or rise only 2 percent against its daily reference rate to avoid similar volatility.