adminHONG KONG. – The renminbi slipped to a fresh four-year low against the US dollar in its first day of onshore trading since the People’s Bank of China said it would measure the exchange rate against a broader basket of currencies. China’s central bank introduced the trade-weighted basket, in which the dollar accounts for 26,4 percent and the euro 21,4 percent, late on Friday. The offshore renminbi promptly dropped 0,5 percent in London trading, pushing the currency to Rmb6,5577 against the dollar, a four-year low.
The PBoC’s management of the renminbi has been under scrutiny since August, when a botched 3 percent devaluation sent shockwaves through world markets and prompted the Federal Reserve to hold off on an expected increase in US interest rates in September.
Friday’s move, coming less than a week before the Fed is expected to raise rates for the first time in nine years, was interpreted as part of a broader effort by the PBoC to be more transparent.
“We believe that it does not equate to an explicit shift to targeting the renminbi against a basket of currencies,” said Claudio Piron, emerging Asia strategist at Bank of America Merrill Lynch.
“The tone of their statement, instead, suggests to us they are trying to shift the market’s heavy focus away from the bilateral rate to several basket measures.”
Yesterday, the PBoC set the daily “fix” against the dollar at Rmb6,4495, down 0,21 percent from Friday’s rate and a four-year low. It was the sixth successive day that Beijing has set a weaker reference rate.
The onshore rate is permitted to trade up to 2 percent either side of that midpoint.
The offshore rate, which has no such restrictions, was at Rmb6,5491 per dollar, having weakened in early trading after a late recovery on Friday.
The spread between the two has risen in recent weeks, indicating investors are betting on further weakness ahead.
The dollar was involved with 95 percent of all onshore foreign exchange transactions last year, according to CICC, but the growing divergence between monetary policy in the world’s major economies has increased the difficulty for China in managing its currency.
Even as markets are braced for higher US interest rates, policy in China, Europe and Japan is still expected to be eased further.
Xiangrong Yu, strategist at CICC, said the introduction of a basket was “a necessary result of the divergence between the economies” and would allow the PBoC to better frame its communication with the markets.
Other countries in Asia are eyeing what happens with the renminbi for fear its weaker path could erode their competitiveness, even though the currency’s still-close links with its US counterpart mean China has not benefited from an export boost as the dollar has rallied this year. – Wires.
Online Reporter