Hardy: Is United States dollars set for rally as China calms nerves?

The PBOC implemented a new procedure for setting the mid-point on Tuesday.

Yesterday the PBOC fixed the yuan at 6.4010. It could also see more “onshoring” of activity back into China and dash some of the hopes of some economies to pick up some of the manufacturing investment that was starting to find China too expensive. By comparison, Korea’s NEER appreciated by 2.1% while Japan’s depreciated by 1.1% over the same period.

Whether the PBOC can continue to manage its devaluation is such controlled manner remains to be seen. Their natural disclaimer is that China’s fundamentals still do not support “continuous” depreciation. NYMEX crude oil prices fell to the lowest for the year. But further depreciation is likely to intensify tensions with the U.S., who believe the yuan is still undervalued.

The People’s Bank of China sought to dispel fears of a prolonged fall in the renminbi yesterday.

Elsewhere, Australian shares were down, with the S&P/ASX 200 index closing 0.6% lower at 5,356.54 points. The cumulative depreciation over 11-12 August was 2.8%. The PBOC have all but declared their intentions – we’re going to see a gradual widening of the FX band, and further liberalisation of capital controls and the interbank market. This was the major reference for market makers to report quotation on 12 August. What’s broke in the US economy is investment and risk-taking, and monetary policy can’t fix that. The trading forces in the market will help correct divergence between the market rate and the central parity.

China’s action has significantly affected equity, bond and currency markets.

Will RMB depreciate persistently in the future?

“In view of both domestic and worldwide economic and financial condition, now there is no basis for persistent depreciation of [the] renminbi”, the statement said. The relatively large fluctuation of money supply and credit aggregates in July is temporary and tractable.

So what we’re seeing here is not just a “devaluation”, but really a fundamental shift in China’s monetary policy regime.

At the same time, China has stated ambitions to add the Yuan to the IMF’s SDR. In the first seven-months of 2015, the trade surplus of goods reached United States dollars 305.2 billion. That doesn’t change the fact that it did the right thing.

The Chinese currency continued its sharp fall for a third consecutive day on Thursday after the central bank reformed the exchange rate formation system. This de facto devaluation has had repercussions across the world, with some speculating that it would even put the Fed off from raising interest rates in September. He has a deep understanding of market fundamentals and the impact of global events on capital markets. Follow on Twitter and on his Google+ profile.