China’s yuan drops for a third day

“In the long run the renminbi is still a strong currency”, PBOC assistant governor Zhang Xiaohui said, adding that China was running a trade surplus and had a sound fiscal position and rich foreign exchange reserves.

Emerging market currencies including the Indonesian rupiah, Philippine peso and South Korean won rose slightly against the dollar after China yesterday trimmed its yuan reference rate 1.1 percent.

China’s decision to move to a more market-oriented exchange-rate mechanism has rocked markets this week, triggering losses among developing-economy currencies and spurring a rush to havens such as bonds and the yen.

If all that is true then why did the Yuan continue to slide yesterday and why is it still sliding today?

In other economic news, data from Statistics New Zealand showed that the total value of retail sales in New Zealand gained a seasonally adjusted 0.1 percent on quarter in the second quarter of 2015, coming in at NZ$18.9 billion.

World stock markets rebounded on Thursday as the fall in the Chinese yuan slowed and the country’s central bank tried to dampen speculation of further devaluation.

“They are doing what any reserve bank would do – cutting interest rates and devaluing the currency to prop up the economy”.

The ICE U.S. Dollar index DXY, +0.33% a measure of the dollar’s strength against a basket of six rival currencies, was up 0.44% to 96.6960 in recent trade.

Chinese shares closed higher on Thursday as fears of further currency depreciation subsided following the central bank’s reassurance that the yuan’s value has “returned to market levels” after days of sharp correction.

Nevertheless, the analyst said Russia’s central bank had originally planned to implement a similar policy of controlled devaluation, selling U.S. dollars to support the ruble if it reached the limits of the established currency corridor.

The yuan is still only allowed to fluctuate up or down two per cent on either side of the reference rate.

The Chinese central bank has effectively been keeping the yuan pegged to the dollar, setting a fixed rate every day and allowing it to trade within 2% on either side of that rate.

There is not a sense that the onshore yuan will weaken forever.

Previously, it based the fixing on a poll of market-makers, but declared it would now also take into account the previous day’s close, foreign exchange supply and demand and the rates of major currencies. On August 11, China decided to devalue its currency in an effort to keep its export-driven economy competitive.

“In the mid-term, it is to be expected that a weaker yuan will help China to increase exports and stimulate growth“.