Chinese authorities announce new formula to fix yuan exchange rate

On Friday, China’s authorities announced another change to the formula to fix the yuan exchange rate. The China Foreign Exchange Trade System stated that the People’s Bank of China is changing the method of fixing rate that will contain a “counter-cyclical adjustment factor”. By introducing the new mechanism, the Chinese central bank is moving further away from permitting market forces to determine the fixings. This is the second revision of the fixing mechanism in 2017. The Chinese central bank had adjusted the fixing mechanism on 20 February. It is unclear how and when the change will happen.

With the new formula, authorities probably intend to raise stability, particularly during periods when outflow of capital exerts downward pressure on the yuan that the authorities might consider excessive, stated Nordea Bank in a research report. Outflows of capital, in recent months, have been restricted, owing to the tightening of capital controls at the end of last year. The foreign exchange reserves data at the end of May will be published on 7 June.

The recent move to set new formula is expected to further lower the transparency in setting the exchange rate and rather provides additional room for the authorities to use their discretion, noted Nordea Bank. Moreover, this decision appears to be partially motivated by the recent developments as during the period of depreciation of the U.S. dollar the authorities have kept setting stronger reference rates than would have been expected.

According to a Commerzbank research report, the USD/CNY pair is expected to trade higher for the time being until the new mechanism is implemented.

At 16:00 GMT the FxWirePro's Hourly Strength Index of Chinese yuan was highly bearish at -135.64, while the FxWirePro's Hourly Strength Index of US Dollar was slightly bullish at 59.4572. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex