China reassures markets on yuan, calms markets

Duke University business professor Campbell Harvey says China wants the yuan to eventually become a “reserve” currency like the dollar and the euro. “Looking at the worldwide and domestic economic situation, now there is no basis for a sustained depreciation trend for the yuan“, the People’s Bank of China said in a statement.

Beijing strictly controls the yuan, allowing it to trade within a range of 2 percent above or below the reference point, which it sets daily. “The one-time total depreciation of around 3% is largely finished … and is a necessary phase in exchange rate reform”.

PBOC Governor Yi Gang said on Thursday that the central bank had already withdrawn from regular intervention but would implement effective management of the exchange rate in case of extreme currency volatility.

Elsewhere, Australian shares were down, with the S&P/ASX 200 index closing 0.6% lower at 5,356.54 points.

The People’s Bank of China “fixed” the rate of the yuan vs. the dollar down another 1% Thursday, which was smaller than Tuesday’s 1.9% devaluation and Wednesday’s 1.6% reduction, and close to last night’s close.

Asian stock markets stabilised this morning with some even strengthening after the surprise devaluation of China’s yuan was halted. Still, market players are not sure how much more the dollar can gain, assuming the yuan could fall further in the face of a slowdown in the Chinese economy.

“It is very possible that we could see a 10 to 15% drop in the exchange rate against the U.S. dollar in the next week or two”, said Duncan Innes-Ker of The Economist Intelligence Unit in a research note.

China’s short-term funding costs climbed slightly this week as Tuesday’s unexpected devaluation of the yuan tightened liquidity in the money market, traders said. The central bank also said it would continue to intervene, as needed.

Beijing’s moves eased concerns a cheaper yuan could trigger a “currency war”, or a competition among the world’s biggest economies to cheapen their own currencies to seek a competitive edge.

The comments come after the PBOC’s yuan moves roiled markets, spurred selling of the currency and sparked criticism from politicians in the U.S. and elsewhere.

ENERGY: Benchmark U.S. crude fell further from a six-year low, down 18 cents at $42.04 per barrel in electronic trading on New York Mercantile Exchange.

The International Monetary Fund welcomed the decision saying: “The new mechanism for determining the central parity of the Renminbi [yuan] announced by the PBC [People’s Bank of China] appears a welcome step as it should allow market forces to have a greater role in determining the exchange rate”.