The People’s Bank of China (PBoC) on Friday set the midpoint for yuan’s trading band against the dollar at 6.4589 — a 0.56 percent strengthening that marked the biggest change since July 2005, when the currency was unpegged from the dollar. The move was part of the central bank’s stated aim to bring the currency reference rate in line with the offshore exchange rate.
On Friday, following the PBoC’s currency fix, offshore yuan was little changed at 6.4834. Earlier, on Thursday, it appreciated 0.3 percent.
“The offshore yuan’s reaction is muted, so it seems the market was already expecting a much stronger fixing,” Ken Cheung, a currency strategist at Mizuho Bank in Hong Kong, told Bloomberg. “This is a reaction to the dollar weakness overnight, and there’s not much in the way of policy intention to read into.”
The central bank’s decision to guide the yuan higher is largely being attributed to the Bank of Japan’s surprise decision to hold fire on fresh stimulus. On Thursday, after the BoJ, defying market expectations, refrained from expanding its already expansive monetary stimulus program, the yen rallied, posting its largest intra-day gain against the dollar in over seven years.
The dollar also weakened against a basket of major currencies. So far this week, the dollar index has dropped over 1.5 percent.
“The central bank is trying to fix the (dollar-yuan benchmark) by following the moves of major currencies against the dollar,” Iris Pang, a senior economist at French lender Natixis, reportedly said in a note.
In August, the PBoC, which has long faced criticism for its frequent interventions, said it would give market forces a greater say while setting the yuan’s spot rate. At the time, the move triggered an effective 2 percent devaluation in the yuan, sparking concerns that the central bank may start a “currency war” of sorts to make China’s exports cheaper.
Currently, the PBoC allows the yuan to rise or fall only 2 percent against its daily reference rate in order to avoid volatility.