Why Don't You Just Tell Me the Price of the Yuan?

Keep raising those long-term USDCNY targets.

ZH: China Unexpectedly Changes Yuan Fixing Mechanism Sparking Confusion, Concern
Today, it was finally unveiled that the sharp moves in the Yuan were in preparation for today's announcement of a new CNY fixing mechanism. Under the new reference rate formula unveiled by the PBOC, institutions that provide quotes for the fixing will now add an intangible counter-cyclical factor to their existing models, which take into account the previous day’s official closing price at 4:30 p.m. local time and changes in baskets of currencies. Banks are currently tweaking and testing their models and will start providing quotes using the new system soon, Bloomberg reported.

In an amusing aside, one which may have been taken straight from the worry-list of the Korean central bank, Bloomberg added that "China’s foreign-exchange market can be driven by irrational expectations, resulting in "unreal" supply and demand that increases the risk of overshooting, according to an official statement on Chinamoney.com, which is run by China Foreign Exchange Trade System. The counter-cyclical factor may ease "herd actions" and help guide investors to pay more attention to economic fundamentals, according to the statement."

In any case, explaining the recent sharp moves, on Friday CFETS said that the recent observed changes in CNY fixings have already reflected the new fixing mechanism, and said that more changes in the fixing and intraday trading patterns are possible in the days ahead.

According to Goldman, in the near term, the authorities might continue to keep CNY relatively strong (as they did in the last two days) to mitigate potential market worries that the mechanism change could be a precursor to the late 2015/early 2016 experience of discretionary currency weakening.

Which of course does not preclude the new regime from becoming the precursor to another deleveraging. Bloomberg points out that for China’s government, the existing market-based fixing system’s downside is that it makes the exchange rate more difficult to control.

...“If the yuan endgame is a free float like the other major currencies, refining the PBOC fixing mechanism is a retrograde step,” Condon said.

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