China’s yuan exchange rate hit its highest level against the US dollar in five years today, after policymakers pledged at the weekend to make the currency more flexible.
The yuan jumped to 6.8089 to the dollar on the nation’s main foreign exchange trading market, its highest since July 2005.
The People’s Bank of China said on Saturday it would ‘‘strengthen the flexibility’’ of the yuan exchange rate, which some analysts saw as a sign Beijing was ready to scrap the dollar peg and allow the currency to rise.
However, the bank came out Sunday to douse expectations, saying there would be no ‘‘large swings’’ in the currency and no one-off adjustment.
The central bank this morning set the central parity rate - the centre point of the currency’s allowed trading band - at 6.8275 to the dollar, unchanged from Friday. Despite the appreciation in the exchange rate, the currency was still within the allowed trading range set at between 6.7934 and 6.8616 today.
Global markets also gave back some gains after Chinese central bank's decision to keep the yuan unchanged from Friday in its fixing today.
"It's a clear signal that the central bank wants to cool down sentiment a little bit,’’ said Hontyuan Securities analyst He Yiefeng. ‘‘The market should not be too optimistic or pessimistic about the future. Appreciation is still around the corner, but it will be modest.’’
The Australian dollar trimmed its gains after the bank's move, suggesting China will proceed gradually in its push to make the yuan more flexible.
The dollar fell to as low as $US0.8752, from around $US0.8800 before the mid-point was announced. The dollar recently stood at $US0.8780, up 0.7 per cent on the day.
The yuan is allowed to trade 0.5 per cent either side of the reference point against the US dollar, so is an important marker for trading sentiment.
"People will be a little puzzled as to why they didn't allow the move to start today," said Endre Pedersen, a fund manager at MFC Global Investment Management in Hong Hong.
"But they should not look at this like a one-day trade. It's a multi-month trade. We are not reading too much into this at all. Over the next few weeks, we would expect the currency to start making some ground against the dollar. But we are not going to trade anything on one number like that."
Earlier, assets leveraged to global growth, from commodities to stocks and Asian currencies, all rose on hopes that China's surprise pledge of yuan flexibility would lessen the risk of a trade war between the world's biggest and third-largest economies.
"It's a relief rally in the sense that this could ease trade tensions into the Group of 20 meeting," said Sean Callow, senior currency strategist at Westpac in Sydney, before China set the reference point.
"Perhaps the excitement has been overdone as this is just a small step on a very long march," he added. "But you have to assume the yuan will rise this week given all the political angst. They need to turn up at the G20 with something real."
Beijing has faced a barrage of complaints from abroad for keeping the yuan artificially cheap even as the country's export juggernaut roared back to life.
Many economists suspect Beijing will nudge the exchange rate higher in increments, not leaps, and they had expected the first sign of such action to come from the setting of the yuan's reference rate on Monday.
The People's Bank of China had surprised everyone on Saturday by saying it would make the yuan more flexible, but by Sunday it already seemed to be playing down the chance of major change.
In a new statement on its website, the central bank explicitly ruled out a one-off revaluation, repeating that there was no basis for any big appreciation and that the currency's value was not far off its fair level.
Still, investors welcomed any sign that Beijing was ready to break a 23-month-old peg to the US dollar.
As well as a nod to trade tensions, a rising yuan would also give China more purchasing power to buy foreign goods, which would be positive for world trade, especially for commodity exporters such as Australia, Brazil, Canada and New Zealand.
The US dollar fell broadly and commodities from oil to base metals had all risen in early dealings, although they lost some allure after the yuan reference point was set.
US S&P 500 stock futures initially rose 1.2 per cent, before paring those gains slightly. Japan's Nikkei 225 rising 1.7 per cent and also edged back after the yuan reference point was set.
Most Asian currencies climbed, with the Singapore dollar up 1 percent on its U.S. counterpart in early dealings.
The region's export-focused countries have been loathe to let their currencies appreciate and lose competitiveness while the yuan was pegged to the dollar.
The improvement in risk appetite led to a broad decline in safe-haven government bonds, with Treasuries taking a double whammy on speculation that Beijing would have less US dollars to invest in US assets if it curbed intervention.
"It's a small step toward the day when China will not automatically pile up reserves to be parked in Treasuries," said Westpac's Callow. "Though that's a distant prospect as yet."
They trimmed their losses after the central bank set the reference point on the yuan.
China has the world's largest war-chest of foreign exchange reserves, estimated at $US2.45 trillion at the end of March. A large chunk of that is invested in Treasuries, helping keep US yields lower than they might otherwise be.
Economists also hope a higher yuan could help temper inflation in China by pushing down import prices, which in turn could mean Beijing would have less need to tighten monetary policy aggressively. Markets have been worried China could over-tighten and suffer a hard landing.
That could make any move by Beijing more palatable to a domestic audience that sees any concessions on the yuan as kow-towing to the United States.
A few websites in China made their views heard.
"This is such worrying news! China, you have surrendered!" wrote one online reader of the Global Times, a popular tabloid.
"We're so well-behaved, doing whatever the United States asks of us," wondered another, sarcastically.
Reuters