It’s the Wrong Time to Free the Yuan

By some measures, China has braved the storms buffeting its currency. The yuan is up 4 percent so far this year, and foreign-exchange reserves are up by $70 billion. State media has even called for relaxing capital and exchange-rate controls. But that would be like a sick person who stops taking his medicine when he feels better: The underlying conditions haven’t really changed.After China’s surprise currency devaluation in 2015, it was reasonable to expect significant pressure on its reserves and the yuan for the foreseeable future. As recently as January — with the Federal Reserve tightening monetary policy, and China’s reserves hitting their lowest level since 2011 — it seemed safe to assume that a rising dollar would hit China hard.But a funny thing happened on the way to the yuan’s collapse. Even though the Fed has raised interest rates three times since December, the dollar has fallen by 8.4 percent. This has in turn propped up the value of the PBOC’s reserves while allowing the yuan — which has a soft peg to the dollar — to rise. The dollar falling faster against global currencies than the yuan gently pushed the yuan up against the dollar.

Source: Why China Can’t Free the Yuan – Bloomberg

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Craig Erlam

Craig Erlam

Senior Currency Analyst at OANDA
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the Wall Street Journal and The Telegraph, and he also appears regularly as a guest commentator on networks including Sky News, Bloomberg, CNBC and BBC. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.
Craig Erlam

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