China cuts US dollar weighting in key currency basket

The number of currencies in the CFETS basket will also be raised, from 13 to 24

PUBLISHED : Thursday, 29 December, 2016, 11:10am
UPDATED : Thursday, 29 December, 2016, 11:16pm

China will reduce the weighting of the US dollar in a basket of currencies it uses to value the yuan.

The CFETS, the country’s foreign exchange trading platform operator, said on Thursday afternoon that from January 1, 2017, the US dollar weighting in the CFETS currency basket will be lowered to 0.2240 from 0.2640. The number of currencies will be increased to 24 from the current 13.

“I do not think the move will influence yuan’s exchange rate against the US dollar,” said Hong Hao, managing director of BOCOM International in Hong Kong. “The adjustment mainly aims to follow trading weights between China and its major trading partners.”

The 11 newly added currencies will account for a 21.09 per cent weighting in the CFETS currency basket. They include the South African rand, the Korean won and the Mexican peso.

The announcement from the CFETS (China Foreign Exchange Trade System) said it was adjusting the composition and weighting to cover the currencies of China’s major trading partners.

“You can notice that Korean won accounts for 0.1077, the fourth biggest one just following US dollar, euro and Japanese yen, as the trading activities between China and Korea are rising,” added Hong.

“Chinese yuan would not fluctuate much because of the adjustment. Traders care much more about the yuan’s rate against the dollar not the basket.”

The offshore yuan in Hong Kong has dropped for three consecutive days, down 0.06 per cent or 41 points at 6.9743 as of 6.50 pm. At one point on Thursday morning, it fell 0.15 per cent to 6.9823, its lowest level in recent history.

The onshore yuan reversed its early loss to close 0.08 per cent or 59 points stronger at 6.9500, breaking a three-day decline.

The People’s Bank of China (PBOC) set the yuan reference rate at 6.9497 against the US dollar on Thursday, 2 basis points weaker than its fixing on Wednesday.

Bloomberg data showed several quotes for onshore yuan at above 7 per US dollar during evening trading on Wednesday, sparking discussion that China’s currency had passed through a psychologically important threshold against the greenback.

The PBOC, in an uncommon move, said on its microblog page overnight that the interbank exchange rate for onshore yuan moved steadily between 6.95 to 6.9666 per dollar on Wednesday. The central bank said that media reports of the yuan weakening beyond 7 per US dollar were “irresponsible”.

Minsheng Securities analyst Zhang Yu wrote in a note that the Bloomberg data were quotation prices rather than transaction prices. He added that the central bank is closely monitoring market sentiment and “filtering market volatility” when setting the yuan fixing.

“Today’s fixing is very stable. But it’s mainly because the US dollar retreated from its rise overnight. [The fixing] was not the result of strong intervention,” Zhang said.

“The onshore yuan is likely to stay below 7. But it will break this threshold soon or later in 2017. In the end it’s just a psychological threshold.”

Standard Chartered expects the onshore yuan to slide to 7.06 per US dollar next year, while it said the offshore yuan would reach 7.07 per dollar.

The US dollar index retreated 0.56 per cent to 102.717 as of 7pm, after climbing to 103.63 overnight, approaching a 14-year high of 103.650.

The British pound at one point dropped to a two-month low of US$1.22 overnight. In Thursday trade, sterling was at 1.2272, 0.34 per cent stronger than Wednesday.