The Chinese yuan fell by 1.4% to about 6.7% against the US dollar during Monday’s trading, after months of appreciation. This came after the central bank changed the rules on Saturday, which made short selling the currency cheaper for traders.
Over the weekend, the People’s Bank of China lowered the foreign exchange risk reserve ratio for futures contracts from 20% to 0%, after banks used to keep 20% of sales of some currency futures contracts.
And the People’s Bank of China announced in its statement that the next step will be to maintain the flexibility of the RMB exchange rate and the stability of market expectations, in order to maintain the stability of the RMB exchange rate mainly at an adaptive and balanced level.
“Overall, this means they are definitely trying to give a signal that they may be dissatisfied with the current pace of appreciation,” said Rohit Garg, director of Bank of America Merrill Lynch.
This move also indicates that the central bank may give internal companies the option to hedge against any kind of dollar strength, which could occur against the backdrop of any kind of uncertainty that will emerge in the next month.
“Now that growth in China has performed much better compared to the United States and the rest of the world, as well as the difference in interest rates is in favor of China as well, will the Chinese yuan in the medium or long term continue to outperform?” Garg said.
While the US Federal Reserve lowered interest rates and indicated that they would remain at zero for years, the Chinese central bank reversed the bulk of the decline in short-term interest rates, which means that Chinese Treasury yields are set to be higher than other major markets.
This could attract investors to Chinese government bonds, and thus be a good thing for the exchange rate.
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