The PBOC clearly gave the Chinese yuan a push upward by allowing the benchmark money-market rate (seven-day repo) to spike twice in the overnight trading session. As the chart shows, both jumps in the overnight repo rate were associated with a rise in the yuan exchange rate. The jump in the repo rate might have been the result of the central bank’s intervention in the foreign exchange market (buying yuan in the open market reduces liquidity).
Chinese interest rates have eased as the end of June approaches, and seasonal demand for funds is reduced. China evidently wanted to send a signal about yuan strength to foreign exchange markets. But that’s not the whole story.
Even more surprising is that the second spike in the yuan exchange rate followed a jump in the euro exchange rate vs. the dollar, following ECB President Mario Draghi’s bullish remarks this morning about the European economy. There were two quite distinct jumps in the yuan exchange rate vs. the dollar. Both seem to have been engineered by the PBOC, as reflected in spikes in the benchmark 7-day repo rate.
The fact that the second jump in the yuan followed a sharp rise in the Euro suggests that the PBOC is targeting the yuan to a basket of currencies, including the Euro, and responded to a bounce in the European unit by intervening in foreign exchange and/or money markets.
There’s been a great deal of speculation about the PBOC’s shifting exchange rate target. This morning’s move suggests a strong weight for the Euro.