Sometimes financial markets set the agenda for the week and as this week began they did so as the Renminbi ( Yuan) of China passed what some might call lucky number 7. The New York Times has put it like this.
The renminbi traded in mainland China on Monday morning at roughly 7.02 to the dollar, compared with about 6.88 late on Friday. A higher number represents a weaker currency. The last time China’s currency was weaker than 7 to the dollar was in 2008, as the financial crisis mounted.
In itself a 0.01 move through 7 is no more significant than any other. But that would be in a free float which is not what we have here. Also there has been a move of the order of 2% in total which is significant for an exchange rate which is both closely watched and would be more accurately described as a sort of managed free float. Anyway you do not have to take my word for it as in a happy coincidence the People’s Bank of China has been explaining its position.
China implements a managed floating exchange rate system based on market supply and demand with reference to a basket of currencies. Market supply and demand play a decisive role in the formation of exchange rate. The fluctuation of RMB exchange rate is determined by this mechanism . This is the proper meaning of the floating exchange rate system. From the perspective of the global market, as the exchange rate between currencies, exchange rate fluctuations are also the norm.
There are more holes than in a Swiss Cheese there as we observe an official denial that China has done this deliberately.
Affected by unilateralism and trade protectionism measures and the imposition of tariff increases on China, the RMB has depreciated against the US dollar today, breaking through 7 yuan, but the renminbi continues to be stable and strong against a basket of currencies. This is the market. Supply and demand and the reflection of fluctuations in the international currency market.
The PBOC clearly does not follow UK politics as otherwise it would know “strong and stable” means anything but these days! For example the Reminbi has fallen by 1.8% versus the Japanese Yen if we stay in the Pacific and by 1.7% versus the Euro if we look wider.
Time for a poetic influence
I regularly report on the rhetoric of central bankers but I am not sure I have seen anything like this before.
It should be noted that the RMB exchange rate is “ breaking 7” . This “7” is not the age. It will not come back in the past, nor is it a dam. Once it is broken, it will bleed for thousands of miles. “7” is more like the water level of the reservoir, and the water is abundant. The period is higher, and it will fall down when it comes to the dry season. It is normal to rise and fall.
Perhaps the online translator does not help much here but there is a lot more going on than for example the English translation of the Japanese government always being “bold action” for the Yen.
Up is the new down
If your currency is falling then the obvious “Newspeak” response is to suggest it is rising.
In the past 20 years, the nominal effective exchange rate and the real effective exchange rate of the RMB calculated by the Bank for International Settlements have appreciated by about 30% , and the exchange rate of the RMB against the US dollar has appreciated by 20% . It is the strongest currency among the major international currencies. Since the beginning of this year, the renminbi has remained in a stable position in the international monetary system. The renminbi has strengthened against a basket of currencies, and the CFETS renminbi exchange rate index has appreciated by 0.3%
However if you are telling people this is due to the market it might be best to avoid phrases like “control toolbox,”
In the process of dealing with exchange rate fluctuations in recent years, the People’s Bank of China has accumulated rich experience and policy tools, and will continue to innovate and enrich the control toolbox.
So let me finish this section by pointing out that the PBOC has “allowed” the Reminbi to go through 7 this morning in response to something we noted on Friday.
Trade talks are continuing, and…..during the talks the U.S. will start, on September 1st, putting a small additional Tariff of 10% on the remaining 300 Billion Dollars of goods and products coming from China into our Country. This does not include the 250 Billion Dollars already Tariffed at 25%…
As the Frenchman puts it in the Matrix series of films.
action and reaction, cause and effect.
One immediate impact of this has been that bond markets have surged again and we are reminded of my topic on Friday. The totem pole for this has been the bond or bund market of Germany where we see two clear developments. Another record high as the ten-year yield falls to -0.52% and as I type this the whole curve has a negative yield. Over whatever time span you choose Germany is being paid to borrow.
I do not envy the person who had the job of explaining market developments to Governor Kuroda at the Bank of Japan daily meeting. Firstly the Yen has surged into the 105s versus the US Dollar which is exactly the reverse of the Abenomics strategy of Japan. Then there was the 366 point fall in the Nikkei 225 index which is not so welcome when you own 5% of the shares on the Tokyo Stock Exchange. At least the trading desk will have been spared the job as they will have been busy buying the 70.5 billion Yen’s worth of equities that are typically bought on down days like this. This is neatly rounded off by the Japanese Government Bond market not rallying anything like as much as elsewhere due to the “yield curve control” policy backfiring and providing a clean sweep.
Oh and the day of woe was rounded off by the South Korean’s buying much fewer Japanese cars.
Regular readers will recall the period that I labelled the Yen and the Swiss Franc the “currency twins”. Well they are back just like Arnie and in fact with a 2.2% rally against the Renminbi it is the Swiss Franc which is the powerhouse today. It has rallied against pretty much everything as we remind ourselves of the last policy statement of the Swiss National Bank.
The situation on the foreign exchange market continues to be fragile. The negative interest rate and the SNB’s willingness to intervene in the foreign exchange market as necessary remain essential in order to keep the
attractiveness of Swiss franc investments low and thus ease pressure on the currency.
Well they were right about “fragile”. Do not be surprised if we see the SNB intervening again which will be further bullish for overseas bond and equity markets as that is where they invest much of the money.
Mind you equity markets are falling now meaning this from last week is already out of date.
SNB‘s pile of U.S. shares hits a record $93 billion on buoyant markets ( Bloomberg)
As I hope that England’s sadly rickety batting order can resist the pressure from a land down under today I have been mulling something else. Both countries have weak currencies at the moment and are perhaps singing along with Level 42.
The Chinese way
Who knows what they know
The Chinese legend grows
I could never lie
For honour I would lie
Following the Chinese way
Just like in the 1920’s will the 2020’s open with some competitive devaluations?
President Trump seems to quite like the idea if his tweets are any guide. In the Euro area we see a central bank that seems set to follow policies which in theoretical terms at least should weaken the Euro although the ECB is swimming against the trade surplus. I have covered the Swiss and the Japanese. So let me leave you with two final thoughts.
In the confused melee has the UK stolen something of a march?
Is there a major economy who wants a stronger currency?