Chinese yuan weakens to 2-week low
Print Edition
THE central parity rate of the yuan weakened 239 basis points to 6.5207 against the US dollar yesterday, a two-week low.
The lowest rate since December 29 came after drops in the offshore yuan against the dollar on Tuesday following rumors that the country’s central bank had notified lenders to suspend the “counter-cyclical factor” in the pricing mechanism of the yuan’s central parity rate.
The People’s Bank of China said in response that parameters of the “counter-cyclical factor” are determined by market-making banks based on their own judgment on the macro-economy and the foreign exchange market.
Last May, authorities introduced the “counter-cyclical factor” to the existing pricing model of the yuan’s central parity rate against the dollar, aiming to moderate pro-cyclical fluctuations driven by irrational sentiment in the forex market.
In China’s spot market, the yuan is allowed to rise or fall by 2 percent from the central parity rate each trading day. The central parity rate of the yuan against the dollar is based on a weighted average of prices offered by market makers before the opening of the interbank market.
The China Foreign Exchange Trade System said China’s forex market is prone to irrational expectations due to a certain level of “pro-cyclicality,” which distorts market demand and supply, and increases the risk of the market exchange rate overshooting. Adding the “counter-cyclical factor” to the existing model will help to correct the trend and steer market attention to the macro-economy, it said.
China has been pushing reform of the yuan’s exchange rate formation system to make the currency more market-oriented and help to stabilize expectations. The yuan has seen sustained strength this year, with its central parity rate strengthening to a 20-month high against the dollar on Monday.
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