Day Three of China’s “managed devaluation” of yuan – now down almost 5%

From Bloomberg News

china yuan 2(Bloomberg) – China’s yuan fell in a third day of losses since Tuesday’s devaluation as the central bank’s reference rate dropped 1.1 percent.

The onshore spot rate weakened 0.5 percent to 6.42 per dollar as of 9:35 a.m. in Shanghai, after a two-day loss of 2.8 percent. The freely traded offshore yuan rebounded 0.6 percent on Thursday after losing at least 2 percent on each of the last two days. The onshore spot rate is allowed to diverge a maximum 2 percent from the reference rate, which was set at 6.4010.

The yuan fell Wednesday to as much as 1.9 percent weaker than the official rate, near the limit of its permitted trading range, before paring losses as the PBOC intervened to support the currency via state-owned banks.

The intervention is “a hopeful sign that the authorities are not shooting for a maxi-devaluation, which we expect will result in market pressure on the spot rate gradually becoming more two-way,” Tim Condon, head of Asian research at ING Groep NV in Singapore, wrote in a note.

Under a new methodology used to determine the fixing, market makers who submit contributing prices have to consider the previous day’s close, foreign-exchange demand and supply, as well as changes in major currency rates. The changes serve the long-term goal of building a more flexible and market-based exchange rate formation system, the state-owned China Daily newspaper said Thursday in an editorial.

There is a “managed devaluation” under way and intervention risk remains high, said Christy Tan, National Australia Bank Ltd.’s head of markets strategy for Asia. “I think they are committed to closing the gap between the fix and market levels. As for where market levels are, it may from time to time be influenced by non-market forces, especially when volatility is high and if they think it can potentially be disruptive.”

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