PBoC to Fed: Thank You for Delaying

Last week, two voting members of the FOMC said an April rate hike was possible. Many believed the PBoC allowed the yuan to depreciate as a warning to the Fed (PBoC Warns Fed: Hike and We Devalue). Yellen is concerned about the effect of yuan depreciation, and on Tuesday, she told the world the Fed will slow/delay rate hikes due to concerns about China. After which, the PBoC went ahead and strengthened the yuan.

CBN: China Raises Yuan Fixing After Yellen’s Speech

The Chinese central bank has raised yuan's daily reference rate for the second day as dollar dropped overnight. The People’s Bank of China on Wednesday rose yuan daily fixing to 6.4841 per dollar against yesterday’s fixing of 6.5060, strengthening the currency by 219 basis points (0.33%), the most in the past week. PBOC allows yuan to trade 2% up or down from its daily reference rate. Analysts believe the overnight decline in dollar value was the likely reason behind the rise in yuan daily fixing. Dollar slipped yesterday and headed for its worst month in five years, following the Federal Reserve Chair Janet Yellen’s speech yesterday.
The changes in exchange rates makes sense independent of central bank policy: a stronger dollar will cause the yuan to weaken versus the U.S. dollar based on the currency basket. For those who believe there is coordination between central banks, however, the past few days provide plenty of evidence. The most interesting aspect of this take is that if you believe the central banks are coordinating, it appears the Chinese are in charge.

I assume markets are in charge until I see evidence of coordination, not only because it is the mostly probable, but because intervention so often fails. At the present trend of lower USD and higher oil prices and assuming the economy isn't slipping into recession, the U.S. will have a big inflation problem in 6 months. Meanwhile, China might still be in trouble 6 years from now at their rate of rebalancing. At some point, the Fed will hike and the yuan will depreciate.

China does like to do things for show though, such as buying a bunch of Boeing planes ahead of a state visit China inks big deals with Boeing, Cisco Systems. If there is any "coordination", it's more likely to be one sided.

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