China on Friday reintroduced a measure designed to brake the yuan’s decline, prompting a sharp rebound by the currency.
According to The Wall Street Journal, the foreign-exchange trading arm of the People’s Bank of China said the central bank had adjusted the mechanism used to set the yuan’s official value each day to keep the yuan from falling too sharply. The adjustment was made by reapplying a “countercyclical factor” to its model, news reports said.
The yuan rallied sharply. One dollar last bought 6.8097 yuan in USDCNY, -1.0570% , down 1%, and 6.8069 yuan USDCNH, -1.3287% in the more freely trading offshore market, down 1.3%.
The reintroduction of the measure reverses a January decision to reduce the factor’s influence on the mid-point fixing mechanism, and comes just one day after U.S.-China trade talks, which were meant to precede a meeting between U.S. President Donald Trump and Chinese leader Xi Jinping later this year.
The factor is designed to keep the yuan from falling too quickly against the dollar, thus acting counter-cyclical to market forces. The Chinese currency is fixed to the U.S. dollar at a mid-point and can move within a defined range from that point. While the PBOC had taken steps to embrace market dynamics earlier in the year, the reapplication of these measures showed a commitment to be involved in the currency’s value more directly again.
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Earlier this month, China had reiterated that it wouldn’t use yuan devaluation as a tool in its trade battle with the U.S., and named the counter-cyclical measure as one way to support its currency. Trump called China a currency manipulator earlier this month, though analysts believe the yuan’s weakness against its U.S. rival can mostly be attributed to dollar strength and a selloff across emerging markets. The Treasury Department has not labeled China a currency manipulator.
The Chinese currency had been in focus for investors as the dollar-yuan pair moved closer to 7 per dollar, which is considered a key level for multiple reasons.
“The first of these was the not unreasonable view that a move beyond here ran the risk of creating significant volatility in already unsettled local markets,” wrote Simon Derrick, chief currency strategist at BNY Mellon. “Secondly, with regional markets becoming increasingly sensitive to movements in the yuan, the risk was that renewed weakness could lead to a race to the bottom in other regional currencies.”
A third factor was the alleged pressure from the Treasury Department on Chinese officials to lift the value of its currency, Derrick said.
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