China’s central bank set its daily currency “fix” at the lowest level in five years, tracking a weaker market price as the dollar rally took its toll on the renminbi.

The greenback has gained against a range of global currencies since minutes from the Federal Reserve's recent meeting raised the likelihood of an interest rate rise as early as June or July.

On Wednesday the People’s Bank of China set the fix 0.34 per cent below the previous day’s, in line with its commitment in August to set guidance based on the previous day’s spot close and the dollar’s moves against other global currencies.

The renminbi closed 0.2 per cent weaker on Tuesday at 6.559 per dollar compared with that morning’s midpoint of 6.5468. The dollar then strengthened a further 0.1 per cent against other global currencies overnight, informing the PBoC’s shift on Wednesday morning.

After touching its weakest level in nearly four months on Wednesday morning, the onshore spot rate closed essentially flat. Traders said they suspected that the central bank had intervened modestly to prevent a sharp fall in the spot rate.

Foreign investors have struggled to interpret China's exchange rate policy since last August, when the central bank changed the way it sets it daily guidance for the currency to track market prices rather than dictate them.

Local market participants broadly agree the renminbi is significantly more market-driven now than it was before the change. Shifting expectations about the timing of the next Fed interest-rate rise — rather than PBoC policy — are now the main force buffeting the renminbi, traders say. 

Guidance from the PBoC each morning, known as the daily “midpoint” price, was once a crucial weathervane of the PBoC's shifting intentions for the exchange rate. That influence has dissipated, traders say, because the midpoint is now set through a more transparent process that reflects market forces. Traders can now predict the midpoint in advance with considerable accuracy, a feat that was rarely possible prior to August.

“Today's midpoint wasn’t anything unexpected. Supply and demand forces have turned against the renminbi, but from what we can see, the central bank is basically following the principles it laid down for the midpoint last year,” said a forex trader at a mid-sized Chinese bank in Shanghai. 

After falling sharply in the early days of 2016, expectations that the Fed would delay further tightening led to a broad rally in emerging-market currencies that also boosted the renminbi. Capital outflow, which had forced the PBoC to spend heavily from its foreign-exchange reserves to defend the renminbi exchange rate, moderated from February

But analysts say that underlying depreciation and capital outflow pressure on the renminbi remains significant, even as the Fed’s more dovish stance earlier in the year provided a temporary respite. 

“The PBoC’s FX reserves have been stable and exchange rate depreciation expectations have ebbed. But the yuan’s twin outflows of foreign investors unwinding carry trades and local firms paying FX debts have continued,” Mansoor Mohi-Uddin, senior market strategist at Royal Bank of Scotland in Singapore, wrote on Wednesday. “Both are now set to flare up again as the Fed gets ready to hike rates this summer.” 

Mr Mohi-Uddin expects the the yuan to fall to 6.80 in the coming months and believes it may reach 7.00 if the Fed hikes rates times two or three times in 2016. 

Twitter: @gabewildau

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