THE central parity rate of the yuan continued to weaken yesterday after hitting a six-year low against the US dollar on Monday. Analysts say this indicates the yuan’s exchange rate has entered a new float range and the yuan will stay basically stable against other currencies.
The central parity rate of the yuan, weakened 90 basis points to 6.7098 against the US dollar yesterday, according to the China Foreign Exchange Trading System.
A senior foreign exchange trade executive from a large domestic commercial bank said this indicated that the yuan’s exchange rate would fluctuate between 6.80 and 6.70 in the future and its recent inclusion in the IMF Special Drawing Rights basket will help the currency stay basically stable against other currencies.
Lu Zhengwei, chief economist with the Industrial Bank, said the high volatility of major currencies such as the pound against the US dollar since the beginning of October led to a stronger dollar index while the yuan’s exchange rate was flat during the National Day holiday.
At present, market makers follow the central parity rate price mechanism, which includes the reference to a basket of currencies, reference closing prices and the filtration mechanism under severe fluctuation.
Following the yuan’s drastic depreciation on Monday, the central bank did not trigger the filtration mechanism as in the past, which is a new signal of more market-oriented policies with a greater tolerance of yuan volatility, said Xie Yaxuan, an analyst with China Merchant Securities.
Sun Lijian, a senior finance researcher with Fudan University, said the yuan is under increasing depreciation pressure since the United States posted better-than-expected manufacturing PMI, consumer confidence index and employment data. Taking into account the November US presidential election, he expected a rise in the US interest rate in the middle of December.
But analysts say the yuan’s exchange rate also follows changes in the supply and demand of the foreign exchange market. As the supply and demand has become basically stable, the yuan’s exchange rate is winning support.
Xie said that from “recent economic data ... the exchange rate is expected to be stable, so the recent depreciation will have a limited influence on the financial market and the behavior of main economic sectors.”