The US dollar has struggled to find traction in recent weeks, sliding lower on the back of reduced rate hike expectations in the year ahead.
Mirroring the performance of most other currencies against the dollar, the Chinese renminbi, also known as the yuan, has also strengthened of late.
Late last week the USD/CNY fell to as low as 6.447 — indicating renminbi strength — leaving the currency at the strongest level against the US dollar since December 11 last year.
While the renminbi is seen to be strengthening by many in markets, helping to calm investor nerves that were rattled by its weakness in the early parts of the year, is actually isn’t.
Against a basket of major currencies, it’s the weakest it has been in years.
The chart below, supplied by ANZ, shows the recent performance of the renminbi against both the US dollar and CFETS RMB basket of currencies.
CFETS (China Foreign Exchange Trading System) is operated by China’s central bank, the People’s Bank of China. The CFETS RMB basket measures the renminbi’s performance against a basket of 13 currencies with weightings largely determined by trade flows between the two nations.
As the chart clearly shows, while the RMB is up against the US dollar, it’s continuing to slide against other major currencies in the RMB basket.
Khoon Goh, senior FX strategist at the ANZ, explains the recent divergence.
“While the RMB has been strengthening against the USD of late, it has continued to weaken against the basket. We note that the decline in the RMB Index has been occurring both during periods of USD strength and weakness,” says Goh. “It would appear that the Chinese authorities are gradually allowing the RMB to adjust lower but with the bulk of the adjustment through other trading partner currencies other than the USD.”
Continuing the five-month weakening trend, against the CFETS basket the renminbi dropped to below 98 on Monday, leaving it at the weakest level seen since November 2014.
Goh suggests this trend will likely continue, albeit at a gradual rate.
Given the concern surrounding weakness in the renminbi against the US dollar in January, along with the potential for spurring capital outflows, it’s interesting to see the polar opposite view investors have expressed to this weakening against other major currencies.