PBOC Responds to Yuan’s Slide with More Flexible Exchange Rate

The People’s Bank of China (PBOC) remarked that it would make the Chinese exchange rate more flexible. This statement of the Chinese central bank comes following the monetary policy committee’s Wednesday quarterly convention. Based on the news posted online by Canadian markets and finance-focused news network BNN Bloomberg, this development involving the PBOC comes as the yuan’s recent rally falters.

We find this news worthy of monitoring because the Chinese yuan is among the important currencies today, next to the US dollar. Any event that impacts it can certainly affect the foreign exchange markets considerably. The Chinese daily yuan fixing has also reportedly drawn attention again. Traders look closely at the reference rate once more to scour for policy signals following their witnessing of a bout of sudden yuan weakness. 

The Chinese yuan’s slide to levels last seen in December 2020 on Thursday was followed by the PBOC setting the reference rate to the US dollar at the weakest level in nearly three months. Since a January high, the renminbi has plummeted about 1.7 percent, following a relentless advance for eight months versus the world’s reserve currency. 

Fiona Lim cited that the Chinese yuan might have attained an interim peak against the US dollar lately. She also mentioned that the steepest portion of the Chinese currency’s ascent might be finished. The Malayan Banking Berhad’s senior currency analyst in Singapore relayed that a sharp rise in Treasury yields, an equity correction in China, and jitters in the broader international markets could keep the US dollar supported against the onshore renminbi.

For the initial time since July 2020, the US dollar-Chinese yuan is back above its 100-day moving average. This event indicates an important technical signal that could lead to more Chinese yuan weakness, which was at 6.54 on Friday, March 26. We learned that before last week, the onshore yuan was trading in a tight 1,200-percentage in point range against the US dollar this year. This figure marks a gap that is fivefold smaller than seen in the whole of 2020.

We believe that the Chinese yuan can gather strength again despite its recent slides. The renminbi has slipped roughly 0.2 percent against the US dollar this year. However, the Chinese currency has demonstrated continued strength against most other leading currencies in the world. This event consists of a 5-percent-plus increase against the Japanese yen and Swiss franc and an over-3-percent gain against the euro. We can attribute plenty of factors to the slides, such as the happenings in China’s domestic economy and the ongoing coronavirus or COVID-19 pandemic’s effects.

Apparently, the Chinese yuan has demonstrated continued robustness versus most other leading currencies as it moves in lockstep with the US dollar. We believe that the renminbi’s drops are temporary. 

We also think that the Chinese currency can rebound from the ongoing coronavirus pandemic much faster than its international peers, considering it is among the world’s leading currencies. The Chinese economy is also gigantic and can gather strength via initiatives and activities in the public and private sectors, all of which can help the Chinese yuan rally sooner.

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