Guest Commentator of CFETS, Mar 3, 2016
On February 29, 2016, the CFETS RMB exchange rate index closed at 99.63, losing 0.52 percent from the end of January; the RMB exchange rate index based on the BIS basket and RMB exchange rate index based on the SDR basket closed at 101.06 and 98.23 respectively, losing 0.35% and gaining 0.14% from the end of January. Generally, the three indices changed slightly since the end of January, which is a reflection of overall stability of the RMB exchange rate against a basket of currencies in February.
Looking from the trend within the past month, the CFETS RMB exchange rate index showed similar trends as in January, mainly fluctuating within a narrow band. In early February, the CFETS RMB exchange rate index gradually fell below 100. After that, although showing movements in both directions, it mainly fluctuated in the narrow band between 99 and 100 and the overall change was limited. The RMB exchange rate index based on the BIS basket and RMB exchange rate index based on the SDR basket continued moving around 101 and 98 separately.
The movement of the RMB exchange rate in February further showed its characteristics of being based upon market supply and demand, and with reference to a basket of currencies. On one hand, after the import and export data of January were published, the RMB exchange rate correspondingly moved strong. The CFETS RMB Exchange Rate Index on February 26th appreciated 0.1% compared with that of February 15th. During the same period, the market exchange rate of RMB against USD appreciated 0.66%, which to some extent reflected the trade surplus in January had reached a historically high level. On the other hand, the average daily difference between the central parity of RMB against USD and previous close (4:30pm) was 179BP, showing the required bilateral exchange rate adjustment of RMB against USD to maintain the stability of RMB exchange rate against a basket of currencies during the 24-hour period. Besides, it is worth noting that the difference was not exactly the same as the movement of any of the three baskets, showing that market makers had taken into consideration not only the CFETS basket but also the BIS and SDR basket when submitting their daily central parity quotes. Moreover, when the fluctuation of the international market increases, considering all the three baskets would effectively play the role of a filter. In general, the above developments are consistent with the RMB exchange rate regime of being based upon market supply and demand, and with reference to a basket of currencies, which was emphasized by Governor Zhou Xiaochuan in the press conference of G20 last week. Such exchange rate regime reflects a balance among market supply and demand, relative stability against a basket of currencies and stable market expectations. The RMB/USD central parity will keep reflecting the characteristics of “previous close + movements of a basket of currencies” in the future. (Source: PBC Website)
