The yuan fixing, China’s official yuan rate against the US dollar set by the country’s FX trading system, has been uncannily strong in recent days.
While the ‘floating’ yuan is trading at 7.16 against the dollar, the yuan fixing was today set at 7.0835. As today’s chart shows, the gap between the two rates is unusually large. In fact, Robin Brooks, chief economist at the Institute of International Finance, has calculated that the current fixing is almost eight standard deviations too strong, which is extreme by any measure. So why is this the case? The most likely answer is that while China is aiming to weaken its currency, it wants to do so in an orderly, gradual manner. This will prevent capital from flowing out the country too fast, even though China’s capital markets remain pretty closed.
It is possible, however, that China is holding back on faster currency weakening in case the trade war with US escalates further, as that wouldn’t be a good thing for risky assets.
