Copper prices survive China currency shock, but importers will be jittery

China’s move to cut the value of the yuan to 6.3306 to a US dollar from 6.2298 Tuesday signaled Beijing was moving to a more market-determined exchange rate from a de facto peg that had propped up the value of the currency for so long.

Both the Chinese currency and the Retail Sales data will keep the world’s most important central banks the hot topics of conversation today as US equity markets enjoy some follow-through on yesterday’s strong reversal rally.

The renminbi’s (RMB) recent weakness was caused by the People’s Bank of China (PBOC) adopting a new mechanism for setting the reference exchange rate between the Chinese currency and the US dollar. It is on track to lose 3% this week.

The yuan’s strengthening Friday eased some worries about the implications of its rapid decline in other regional currencies.

“The central bank has the power to maintain the stability of the renminbi and to ensure that it remains at a reasonable and balanced level”, Zhang Xiaohui, assistant governor of the PBoC. told the press.

The offshore yuan was trading 0.81 per cent away from the onshore spot at 6.444 per dollar. “The market certainly perceives that the Chinese authorities don’t want the CNY to weaken too dramatically”.

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

The yuan has fallen nearly 5% against the dollar this week after China devalued its currency in a surprise move on Tuesday in a bid to shore up growth in the flagging economy.

The Bloomberg-JPMorgan Asia Dollar Index, which tracks the region’s 10 most-active currencies excluding the yen, retreated 2.1 percent from August 7, its biggest weekly drop since September 2011.

China’s central bank has stopped “regularly” intervening in the foreign exchange market but could still conduct “effective management” of the yuan in cases of extreme volatility, its vice-governor said, as policymakers tried to stem selling this week.

“The central bank, if necessary, is fully capable of stabilizing the exchange rate through direct intervention in the foreign exchange market to avoid the herd mentality resulting in irrational movements of the rate”, he said. You needed to create domestic demand, and so they raised interest rates.

The Chinese Government had been lobbying the International Monetary Fund to include the yuan in its basket of reserve currencies known as the SDR (special drawing rights) group, which it used to lend to sovereign borrowers.