China emphasis now on the currencies basket - AmpGFX

Greg Gibbs, Director at Amplifying Global FX Capital, notes that the Chinese government has moved to emphasize management of its exchange rate against a basket of other currencies.

Key Quotes

“The China Foreign Exchange Trading System, an arm of the PBoC, has been publishing a weekly update of the CFETS RMB index on a weekly basis since December.  It is a measure of the CNY against a basket of 13 currencies with weights based mainly on international trade, according to the PBoC.

The basket is highly influenced by the EUR and JPY.  It also includes a 4% weight in GBP.  It doesn’t include anything for KRW or TWD, despite the significance of trade with and in competition to Korea and Taiwan, but it includes the THB, MYR, and SGD.  The SGD runs its own currency basket, with significant components for major currencies.  There are also a number of commodity currencies.

As a result of the significant rise in recent weeks of the USD against other major currencies, (EUR, JPY, and GBP), the currency management approach in China has tended to also result in a significant rise in the USD against the CNY.

In turn, this has spilled over to weakness in its close neighbours’ currencies, KRW and TWD, and some broader weakness in Asian currencies.

There is a degree of self-fulling prophecy here.  The increasing importance of CNY for Asia and global markets has contributed to some additional gains in the USD against developed and emerging currencies.”