China’s yuan rose to its highest level since last year, climbing on Wednesday and Thursday, following reports that the People’s Bank of China will add a “counter-cyclical adjustment” factor to their daily currency fixing methodology.
Though few details were given, the proposed changes signaled the PBOC is likely moving in the opposite direction of earlier pledges to rely on more market based approach and would use the changes to help avert currency depreciation.
“The consensus viewed the introduction of the counter-cyclical adjustment factor as signalling the PBOC’s desire for a stronger yuan,” Tim Condon, managing director at ING Financial, was quoted by CNBC as writing in a note on Thursday.
“We thought the fixing formula tweak would ‘work’ eventually in persuading people that, like the rest of dollar/Asia ex-Japan, when the dollar depreciates against major currencies (DXY goes down), it should depreciate against the yuan,” Condon said. “But we thought it would take more than one session.”
The yuan rally came despite weaker than expected data from the Caixin/Markit Manufacturing Purchasing Managers’ index, which fell to 49.6 in May, versus consensus forecast from a Reuters’ poll of 50.1.
The currency’s rise also comes on the heels of Moody’s Investors Service’s downgrading of China’s sovereign debt rating last week. Beijing made clear its displeasure with the rating agency’s decision, and is clearly determined to discourage pessimism in the market.