China’s central bank raised its yuan reference rate by the most in five months, taking analysts by surprise and triggering the currency’s biggest gain since March just two weeks after a switch to a more market-oriented fixing.
The central bank’s rate was strengthened by 0.15 percent on Friday to 6.3986 per dollar, while Commonwealth Bank of Australia’s (CBA) Andy Ji said he’d anticipated almost no change. The outcome also surprised Standard Chartered Plc. and Australia & New Zealand Banking Group Ltd., with the latter saying the adjustment could be linked to authorities’ efforts to prop up markets before a World War II victory parade next week.
“It’s surprising in a sense that the fixing was lower than expected,” said Ji, a Singapore-based currency strategist at CBA. “People are still figuring it out.”
The strengthening of the reference rate raises questions about policy-makers’ role in determining the level. The People’s Bank of China (PBOC) devalued the yuan on August 11 and adopted a new methodology for setting its official rate, saying market makers who submit contributing prices would have to consider the previous day’s close, foreign-exchange demand and supply, as well as changes in major currency rates. The central bank didn’t elaborate on its role in determining the fixing.
The yuan in Shanghai climbed as much as 0.31 percent, its biggest intraday gain since March 19, before trading 0.18 percent stronger at 6.3938 per dollar as of 12:50 p.m. local time. It rose 0.35 percent in Hong Kong’s offshore market. The PBOC didn’t respond to faxed questions regarding the setting of Friday’s reference rate.
The onshore spot rate is allowed to diverge from the central bank’s rate by a maximum 2 percent and the fixing was used to guide market expectations prior to this month’s devaluation. Since the weakening of the exchange rate and the changes to the reference rate’s calculation, the PBOC has been intervening to support the yuan, a policy that eats into its $3.65 trillion of foreign-exchange reserves.
Friday’s fixing could be a signal that the PBOC wants to stabilize the exchange rate, according to Eddie Cheung, a foreign-exchange strategist at Standard Chartered in Hong Kong. Cheung said he is still trying to assess how much weight the central bank attaches to each on the inputs for its daily reference rates.
“The problem is we need more observations for the model,” he said. “We only have about 10 days or so.”