In what can be perceived as a friendly gesture towards the BoJ's decision of leaving monetary policy unchanged, China's PBoC lowered its USD-CNY fixing rate by 365pips today. It was the biggest daily decline since July 2005 and was greater than what would be implied by the overnight changes in the RMB CFETS basket.
The RMB's basket weakened modestly despite the significantly stronger fix. After all, the JPY strengthened more than 3% and the EUR rallied 0.8% since the BoJ's decision yesterday, and these two currencies account for a considerable portion of RMB CFETS basket (14.7% and 21.4% respectively).
China's authorities are taking the window of a soft USD to experiment greater RMB flexibility but on a broader basis. This is still needed as China remains committed to capital account liberalization. China is welcoming the continued “global currency truce” amongst major central banks.
“We expect further weakness by the RMB on a real effective exchange rate basis (REER) this year, and importantly this means that it should not be solely channelled through the USD. A stronger EUR and JPY would be easier for RMB's overvaluation to unwind in a gentler manner.” said HSBC Global Research in a report.
The material has been provided by InstaForex Company – www.instaforex.com