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China's yuan further strengthens against USD

2018-08-28 16:00

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China's yuan strengthened against the U.S. dollar for the second trading day on Tuesday after resuming a "counter-cyclical" factor in the yuan-dollar pricing formula.

The central parity rate of the yuan strengthened 0.67 percent to 6.8052 against the greenback Tuesday, the strongest it has been since August 2, according to the China Foreign Exchange Trade System (CFETS).

The rate strengthened after the CFETS stated on Friday that Chinese banks had adjusted the "counter-cyclical" factor in the pricing mechanism of the yuan-dollar central parity rate.

The CFETS said most of the foreign exchange (forex) dealer banks had made the adjustment on their own initiative since the beginning of August to offset procyclical sentiment amid a weakening yuan in the forex market.

The currency saw a softening trend over the past months due in part to a stronger dollar and a volatile global trade climate, and there have been lingering market expectations of continued slips.

To curb forex market fluctuations driven by irrational sentiment, China's forex regulator allowed dealer banks to incorporate the "counter-cyclical" factor into the existing pricing formula of the yuan-dollar central parity rate in May 2017.

In January, after the market returned to normal with balanced capital flows, banks rolled back the adjustment and shifted the "counter-cyclical" factor to neutral.

In the spot forex market, the yuan can rise or fall by 2 percent against the dollar from the central parity rate each trading day. The central parity rate of the yuan against the dollar is based on a weighted average of prices offered by market makers before the opening of the interbank market each trading day.
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