Euro, Swiss Franc, Japanese Yen Constrained by PBoC’s ‘Basically Stable’ Renminbi

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The Euro, Swiss Franc and Japanese Yen all rallied smartly on Tuesday as global equity markets rebounded strongly from prior lows but the recoveries in EUR/USD and declines in USD/CHF and USD/JPY were stymied, perhaps only temporarily, as EUR/CNY, CHF/CNY and JPY/CNY collided with their daily limits.

EUR/USD rose some 0.78% to reach an intraday high of 1.0992 in early European trade on Tuesday as local equities followed their Asian counterparts higher in a relief rally off the lows seen on Monday, however, the pair topped out just as EUR/CNY peaked at 8.0562 and within a whisker of Tuesday’s upper limit of 8.0738.

“Ultimately, I think it can head higher, but it is proving tough to hang on, and hence options are really the best way to play it,” says Laoise Ni Thighearnaigh, an FX trader at JPMorgan, in a Tuesday market commentary.

“Key levels remain reasonably far off current spot, below at 1.08 (Liberation Day lows) and 1.0730 (200 day), and above at 1.1147 (high for this move), 1.1215 (Sep 24 high) and 1.1275 (2023 high),” she adds.

Above: EUR/USD shown at 15-minute intervals alongside EUR/CNY. Click for closer inspection.

Similar was true of the Swiss Franc, which pushed USD/CHF briefly to intraday lows of 0.8510 ahead of the North American open, leading CHF/CNY to rise as far as 8.6033 in a rally that lifted it over and above Tuesday’s upper limit of 8.5900, before both pairs reversed sharply, perhaps in response to intervention.

The same thing happened with the Japanese yen as USD/JPY fell 0.98% to intraday lows around 146.69, leading JPY/CNY to rally to an intraday high of 0.0499, with 100JPY/CNY coming within a whisker of Tuesday’s upper limit at 5.0143, before both pairs reversed lower, perhaps in response to intervention.

“I did resell some [USD/JPY] in cash overnight on the Bessent headlines highlighting heading into negotiations that Japanese non-tariff barriers are very high (read as the currency is too weak!),” Thighearnaigh says. 

"This should comes as no surprise given Trump singled out the weak JPY as a non-tariff barrier, so things could get pretty interesting here going forward," she adds.

The upper limits for all three above-referenced currencies were lowered slightly on Tuesday as the People’s Bank of China reduced the central parity fixings for EUR/CNY, CHF/CNY and 100JPY/CNY to 7.915, 8.4216 and 4.9160, respectively, from 7.9356, 8.4607 and 4.9942 previously.

However, these would likely rise again on Wednesday if the PBoC follows the rules comprising its own Central Parity Formation Mechanism, one of which prescribes that its fixes should follow in the direction of the prior day’s market movements. 

Above: USD/CHF shown at 15-minute intervals alongside CHF/CNY. Click for closer inspection.

As part of its managed-floating exchange rate system, the PBoC establishes central parities for each of the 25 other currencies featured in the China Foreign Exchange Trade System (CFETS) Index at 9:15 am local time each day, and only permits each CFETS/CNY pair to rise or fall 2% above or below that parity level.

However, sometimes the central parities are set at levels that provide less than 2% of headroom on either side - usually when the authorities are resisting either a depreciation or an appreciation - and it’s not possible for the PBoC to enforce simultaneous tops or bottoms in many of the CFETS/CNY pairs without also imposing limits on the CFETS/USD pairs.

The PBoC raised the central parities for exactly 12 of the 25 currencies in the CFETS basket on Tuesday, with these accounting for 49.76% of the barometer, in fixings that seemingly reflect Beijing’s often-repeated preference for a ‘basically stable’ trade-weighted exchange rate.

The balanced fixes contradict the widely-held notion that Beijing might be seeking to devalue the renminbi, while reinforcing the tentative bottom and six-month lows marked out by the RMB/CFETS index in mid-March, which saw the Federal Reserve’s Broad Dollar Index and the ICE US Dollar Index both follow suit soon after.

Above: USD/JPY shown at 15-minute intervals alongside JPY/CNY. Click for closer inspection.