Yesterday’s reference rate was set more than 700 points from the expected, on the side of a much stronger yuan. I did a double take on the rate:
USD/CNH longs were slammed:
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People’s Bank of China USD/CNY reference rate is due around 0115 GMT.
The People’s Bank of China (PBOC), China’s central bank, is responsible for setting the daily midpoint of the yuan (also known as renminbi or RMB). The PBOC follows a managed floating exchange rate system that allows the value of the yuan to fluctuate within a certain range, called a “band,” around a central reference rate, or “midpoint.” It’s currently at +/- 2% and some think it could widen to 3% this year.
How the process works:
- Daily midpoint setting: Each morning, the PBOC sets a midpoint for the yuan against a basket of currencies, primarily the US dollar. The central bank takes into account factors such as market supply and demand, economic indicators, and international currency market fluctuations. The midpoint serves as a reference point for that day’s trading.
- The trading band: The PBOC allows the yuan to move within a specified range around the midpoint. The trading band is set at +/- 2%, meaning the yuan could appreciate or depreciate by a maximum of 2% from the midpoint during a single trading day. This range is subject to change by the PBOC based on economic conditions and policy objectives.
- Intervention: If the yuan’s value approaches the limit of the trading band or experiences excessive volatility, the PBOC may intervene in the foreign exchange market by buying or selling the yuan to stabilize its value. This helps maintain a controlled and gradual adjustment of the currency’s value.
Note that the PBOC’s management of the yuan’s exchange rate has been a source of controversy, with some arguing that the central bank undervalues the currency to gain a trade advantage. However, in recent years, China has been moving towards a more market-oriented exchange rate system and has allowed greater flexibility in the yuan’s value.
This article was written by Eamonn Sheridan at www.forexlive.com.
