US Dollar (USD), Chinese Yuan (CNY) Stronger On Central Bank Currency Fix

People's Bank of China

In point of fact, after experiencing a havoc-scale volatility in the currency market amid a flurry of uncertainties, currency markets calmed down and volatility gauge seemed to be weakening after China set midpoint rate for its currency at 7.0039, however, the midpoint price for offshore Yuan had still been in its weakest level in more than a decade.

The fix was more than 100-bps firmer compared to market projections based on a recent Bloomberg survey, indicating that the PBOC was utilizing its "counter-cyclical" policy to send a message to the global currency trade that the government wants to nip the currency's devaluation.

The U.S. dollar is too strong and is hurting exports, President Donald Trump said on Thursday, attacking the Federal Reserve for keeping interest rates higher than he would like.

His comments sent USA stocks sharply lower, losing as much as 250 points, undercutting a recent recovery from the continued concerns the trade war will cause a slowdown in the global economy. The currency is now trading at just over 7 yuan to the dollar.

While a weaker currency is a natural effect of China's worsening economy and a central bank in easing mode, Monday's sudden depreciation made it a target of criticism from the Trump administration.

The following explains the working of China's currency regime. The yuan was the world's dullest currency only a few weeks ago, even as tensions with the US on trade suddenly escalated.

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China's currency weakened slightly on Friday to 7.0501 per greenback, following a daily reference rate from the People's Bank of China that was in line with estimates.

China let the yuan slide past the key 7 per dollar level on Monday for the first time since the global financial crisis, days after the United States threatened to slap a 10% tariffs on $300 billion of Chinese goods. "They're going to, and we're going to take strong action against them..."

The exchange rate of China's yuan to the dollar hit the symbolic threshold of 7 to 1 at the start of the week, fuelling further speculation about a deliberate move by Beijing to boost support for its exports while engaged in a trade war with the U.S., the world's largest economy.

The yield gap between Chinese and US benchmark 10-year government bonds stood at 134 basis points on Friday afternoon, compared with a low of 28 basis points hit in November.

"The real effective exchange rate is one benchmark, and on that measure the yuan looks fairly valued at the moment", said Julian Evans-Pritchard, senior China economist at Capital Economics in Singapore.

So far, China has argued that the fluctuation in the yuan exchange rate is due to market forces.

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