Explainer: the PBOC USD/CNY fix and how it impacts FX markets https://www.forex.com/en/news-and-analysis/explainer-the-pboc-usd-cn...

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Explainer: the PBOC USD/CNY

fix and how it impacts FX
markets
With the influence of the Chinese yuan stet to increase further, this
primer looks at the PBOC's USD/CNY daily ‘fix’, an event every trader
should become familiar with given its importance to currency
markets.

By : David Scutt, Market Analyst LET US HELP

• The use of the Chinese yuan in the global financial

system is growing
• China’s currency does not float freely like other major
currencies
• The PBOC sets the yuan’s value through a daily ‘fix’
• It can be used to counteract market forces, creating
volatility in other currencies and asset classes

FX transactions involving the Chinese yuan are growing

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Explainer: the PBOC USD/CNY fix and how it impacts FX markets https://www.forex.com/en/news-and-analysis/explainer-the-pboc-usd-cn...

rapidly, making its movements increasingly influential on

other currencies, especially in Asia. As China moves
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towards overtaking the United States as the largest
economy in the world, the yuan could one day rival the US
dollar in terms of global dominance.

With use of the Chinese yuan likely to grow further, we look

at the USD/CNY daily ‘fix’, an event every trader should get
familiar with given its importance to broader markets.

CNY share of global FX turnover

is growing rapidly
According to the Triennial Survey of OTC FX markets from
the Bank of International Settlements (BIS), the Chinese
yuan’s share of global turnover turnover rose from 4% in
th th
2019 to 7% in 2022, seeing it jump from the 8 to 5 most
traded currency globally.

Turnover involving USD/JPY grew rapidly over the same

period, rising from 4.1% of global share in 2019 to 6.6% in
2022, only exceeded by EUR/USD, USD/JPY, USDGBP. It’s now
the fourth most traded FX pair globally.

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Source: BIS

What is the USD/CNY fix?

The USD/CNY does not float freely like other major

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currencies, allowing market forces to determine valuations.
Instead, it’s heavily influenced by China’s central bank, the
People’s Bank of China (PBOC), who establish its starting
level each day.

This event, known as the ‘fix’ or central parity rate, occurs

around 9.15am in Beijing. The level nominated by the PBOC
is the midpoint of where USD/CNY will be allowed to trade
during the session. The PBOC allows USD/CNY to trade in a
range 2% either side of the fix, providing some scope for
market forces to determine its valuation.

Prior to 2014, the range USD/CNY was allowed to trade in

daily was significantly tighter, starting off at just 0.3% either
side of the fixing level. Before 2005, USD/CNY was pegged at
8.2765 regardless of underlying fundamentals. While the fix
is determined by movements across a basket of major

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currencies, the USD/CNY rate receives most attention given

the sheer level of turnover and trade between the two
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nations.

Source: Refinitiv

PBOC tolerant of market forces

to some degree
While there’s now greater flexibility in the USD/CNY
exchange rate, the PBOC has shown it will not tolerate
movements deemed as undesirable, often setting the USD/
CNY fix at levels not comparable to where market forces
would suggest.

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In late 2023 and early 2024, the PBOC pushed back against
depreciation pressure on the yuan, setting the fix stronger
than where overnight movements in FX markets would
imply. Concerns over capital flight adding to depreciation
pressures, along with China's international competitiveness
with trading partners, may explain why the PBOC took these
steps.

Market forces have forced the

PBOC’s hand before
The PBOC can repel market forces for considerable periods
given its US$3.225 trillion in FX reserves, providing a
substantial war chest to support the yuan. During periods of
sustained yuan weakness, it is not unusual to see Chinese

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state banks selling foreign currencies to boost its value.

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However, prolonged and substantial weakening has forced
the PBOC’s hand before.

The most famous instance occurred in 2015 when the PBOC

surprised markets by fixing the USD/CNY nearly 2% weaker
than expected, resulting in increased volatility in markets
and amplifying concerns China was seeking to gain an
unfair trade advantage over rivals by competitively
devaluing the yuan.

The move led to the United State to label China as a

currency manipulator and contributed to the trade war
when President Donald Trump took office in 2016.

Should we see a similar devaluation episode again, a

scenario that screens as plausible given weakness in
China’s economy, the potential for volatility could be even
greater given the increased role the yuan plays in the
global financial system.

It would be expected to contribute to a strengthening in the

US dollar, impacting valuations for other currencies against
the greenback, especially Asian FX names. Alternatively,
should depreciation pressure swing in the opposite
direction, it would likely contribute to US dollar weakness
against other currencies.

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Given the PBOC's role in determining the USD/CNY starting
point, sudden changes in the yuan's value will impact FX
markets immediately after the fix. For this reason alone, a
casual glance when it's announced is a habit every trader
should consider.

-- Written by David Scutt

Follow David on Twitter @scutty

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