FOREX REVIEW: a continued calm in the markets

The renminbi has ended the week slightly stronger against the US dollar, but the small size of the move has underscored Beijing’s continuing preference for stability rather than a continued appreciation. USD/CNY closed Friday at 6.75, compared with 6.75 a week earlier; at unrounded market rates, the pair fell from 6.7515 to 6.7471, meaning the RMB gained about 0.07%. The relative calm matters because it has allowed China to maintain an accommodative monetary policy at home without triggering renewed international pressure on the currency.

The PBOC has reinforced that message through its daily fixings. It set the USD/CNY fixing at 6.79 on Friday, compared with market expectations around 6.75, continuing a pattern of setting the fixing weaker than traders expected. That suggests policymakers remain wary of allowing the RMB to strengthen too quickly, which would make Chinese exports more expensive overseas. At the same time, the PBOC has pledged to maintain an “appropriately loose” monetary stance and ample liquidity as China contends with slowing growth and weak domestic demand. 

The standout move against another major currency has been the Japanese yen. China’s official reference rate moved from about 4.22 yuan per 100 yen on July 31 to 4.28 on August 7, meaning the yen gained roughly 1.4% against the RMB. That largely reflected events in Japan rather than China: the yen has rebounded sharply after a rare coordinated currency intervention by Japan and the US, following its slide to around 40-year lows against the dollar. Movements against the euro, pound and Australian dollar have been less significant.

For China, the week has therefore been less about currency strength than currency control. 

The RMB remains near multi-year highs against the dollar but without appreciating fast enough to create a major additional headwind for exporters. Attention will now turn to Chinese credit data, expected to show very weak borrowing in July, as well as US inflation figures. Weak Chinese credit demand would strengthen the case for further monetary support, while US data will help determine whether dollar weakness can continue doing some of Beijing’s currency-management work for it.