SHANGHAI, May 31 (Reuters) – China’s onshore yuan surged to its strongest level in more than four months against the U.S. dollar on Wednesday on views that the central bank is now less inclined to allow the currency to depreciate markedly against the dollar. Those suspicions were reinforced on Friday after the China Foreign Exchange Trade System (CFETS) trading platform, which is overseen by the central bank, said it was introducing a new factor in its calculations for the yuan’s daily reference rate. CFETS did not specify what the new “X” factor was, apart from describing it as a “countercyclical factor” apparently intended to curb volatility and speculation. Market players had already begun to suspect a possible change in the way the PBOC’s was calculating the daily midpoint after a series of fixings in May did not meet the predictions of their computer models. The latest move would be the second time this year that China has changed how it calculates the yuan’s guidance rate in an effort to stabilise the currency and reduce price swings. ING believes the main problem for Chinese authorities was that when the dollar index dropped, the yuan also weakened versus the dollar. “We infer that the authorities tired of having to intervene in the foreign exchange market to counter what they consider irrational yuan depreciation pressure,” ING’s Asia economist Tim Condon said in a note. “They identify the problem as a bug in the ‘closing price plus basket’ formula that assigns too much weight to the closing price. The modification fixes the bug.” Stephen Innes, senior trader at OANDA said the latest policy shift could be “another hit to the PBOC credibility who continued to struggle to get their house in order”. Chinese authorities were sharply criticized internationally in 2015 and early 2016 for not being transparent enough about policy shifts, particularly involving Beijing’s foreign exchange regime.
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