China’s Renminbi Falls Most against USD Since 2008, China Eases Support for Currency

The Chinese Renminbi has dropped to its weakest levels today against the USD, since 2008. The freefall in the Renminbi comes amid the speculation that China would be easing down its support for the local currency.

Renminbi Is Losing Its Positions against USD

Earlier today, the onshore Renminbi weakened by 0.3% moving to 7.2354, the level last seen 14 years ago. China’s central bank – The People’s Bank of China (PBoC) – has set a daily reference rate of 444 pips higher than the average estimate of the Bloomberg survey.

The bias remains the smallest in two weeks with clear signs that Beijing could be easing its support for the currency amid the surge of the Dollar index and drop in global exchange rates. Ms. Fiona Lim, a senior foreign exchange strategist at Maybank in Singapore, said:

“The fix allows more room for market forces to drive the yuan based on monetary policy divergence and market momentum. This does not mean that PBOC will not deploy other tools to prop up the yuan. We cannot help but note that the move this morning could contribute to drags on other non-dollar currencies that are already under pressure.”

This month alone, the onshore Renminbi has dropped 4 percent against the USD. This is its worst annual loss since 1994. The Chinese currency comes under pressure as the country’s monetary policy diverges further from the Fed policy.

The Global Macro Environment

On Tuesday, Fed officials have been pushing for higher interest rates in the U.S. to restore price stability. On the other hand, Beijing is maintaining an accommodative stance while facing the risk of deflation. Amid the ongoing property crisis and Covid-19 restrictions in the country, the demand is dropping petty fast.

As a result, the PBoC has stepped up its efforts to support the Renminbi. For 25 straight sessions, the Chinese central bank has set stronger-than-expected Renminbi fixings. However, this move has yielded limited results.

Earlier this week, PBoC imposed a risk-reserve requirement of 20% on the currency forward sales by banks. This was to make it more expensive to short the Renminbi. As the Dollar index rises steeply, policymakers in other countries are also stepping up their efforts for defending their currencies. As per Nomura Holdings, Asian central banks are likely to bring their “second line of defence” such as macroprudential and capital accounts tools.

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Bhushan is a FinTech enthusiast and holds a good flair in understanding financial markets. His interest in economics and finance draw his attention towards the new emerging Blockchain Technology and Cryptocurrency markets. He is continuously in a learning process and keeps himself motivated by sharing his acquired knowledge. In free time he reads thriller fictions novels and sometimes explore his culinary skills.