There has been growing chatter in the market about what the moves to weaken the Chinese yuan over the past couple of weeks and the PBOC’s decision to widen the band a day ago mean for the currency.
Yesterday the State Authority for Foreign Exchange (SAFE) said: “The recent movement of the renminbi exchange rate is the result of market players adjusting their near-term renminbi trading strategies.”
Which is exactly the point, according to Huw McKay of Westpac who said in a note to clients:
“The end-January FX positions of China’s banks were released today. They show a large increase in net FX settlement activity on behalf of clients in January to $US76bn from $US33bn in December. This enlarged open position is presumably the ‘speculative element’ that the PBoC is reputedly looking to flush out with its recent CNY fixing tactics.
But besides the decision to target speculators, the PBOC and SAFE have another issue in mind – the loss of competitiveness of Chinese exporters relative to the rest of Asia and the world because of the appreciation of the yuan.
“The CNY NEER is up 7.7%yr – which is no doubt more than the administration thinks appropriate given the domestic inflation backdrop and the state of global demand. By edging higher against the USD while it appreciates on a broad front, China has lost a degree of competitiveness to its EM peers and the non-US G3. China often makes a policy move only when there are multiple, or at worst dual benefits to be had. Here we have two: slower erosion of competitiveness and a shot across the bow of the ubiquitous speculator.”
Chinese data has been printing weaker and just like the RBA wants a lower Aussie dollar to help Australian growth, the PBOC is seeking the same outcome for the Chinese economy via a weaker yuan.
It seems the Currecny Wars are still raging.