China Adds Collapsable Currencies to CFETS Basket, Admits Will Manipulate Yuan

The CFETS basket is changing, with the addition of currencies that can collapse. If the U.S. Dollar Index rockets to 120, USDCNY is going to blast well past 8.

Update: A quick calculation based on the old and new weights. By my count, if the CFETS RMB Index is baseline 100 at the end of 2015, it falls to 94.09 in 2016. If the 2017 basket was in effect, it would be 94.72 at the moment. If the 2017 basket was in force since 2014, the CFETS RMB Index would be 97.08 at the moment.

Also, according to the announcement (2017年起CFETS货币篮子新增韩元等11种货币), the index will begin anew each year. The CFETS RMB Index will reset to 100.

Reuters: China expands CFETS index basket, yuan seen weakening vs. dollar
China will change the way it calculates a key yuan index in the new year, nearly doubling the number of foreign currencies in a basket that is used to set the yuan's value, its foreign exchange market operator said on Thursday.

...Starting on Jan. 1, the number of currencies in the CFETS basket will be increased to 24 from 13, the China Foreign Exchange Trade System (CFETS) said in a statement on its website.

..."If the dollar strengthens sharply, weakening in the yuan will be inevitable."
I expected a weaker yuan in years past solely because China was reducing the size of the U.S. dollar in its reserves, while increasing the euro and yen. Since I expected a U.S. dollar rally, it's obvious the yuan would diverge. In the past year, the yuan tracked very closely with the euro, but next year, it should depreciate faster. China is adding more volatile currencies, while reducing the weight of the dollar and euro.
The 11 currencies to be added, including the Korean won, the South African rand and the Mexican peso, will have a 21.09 percent weighting in the basket, which the CFETS said would basically cover the currencies of China's major trading partners.

The dollar's weight will be reduced to 22.4 percent from 26.4 percent and the euro's to 16.34 percent from 21.39 percent, the CFETS said in its statement.
The CFETS basket will be more stable, but the renminbi divergence from USD with increase amid a dollar bull market.

The final important bit of information is China admitted it's not trying to create a stable basket for the yuan, but manipulate the currency. The dollar is being reduced because China wants a weaker yuan, and no doubt the dollar will be added back once it starts depreciating again:
It said it would adjust the composition and weighting of its currency basket annually.
The Trump Administration has all the evidence it needs to declare China a currency manipulator.

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