Pound Sterling Helped as Euro, Yen, Swiss Franc Rise on Improved RMB Fixes

Image © David Holt, Accessed: Flikr, Licensing Conditions: Creative Commons

Pound Sterling rose smartly against a receding US Dollar on Wednesday as the Euro, Japanese Yen and Swiss Franc each rose further against the Renminbi and greenback following the People’s Bank of China’s latest central parity fixings.

GBP/USD climbed as far as 1.2856 and back to levels last seen ahead of Monday’s global market meltdown after the PBoC’s latest fixings created additional room for some currencies to rise further against their Chinese counterpart and, by mechanical implication, the US Dollar also.

Previously, on Tuesday, pairs including USD/CNY, EUR/CNY, JPY/CNY and CHF/CNY repeatedly tested their maximum allowable levels, likely leading the PBoC to intervene with suppressive effects on how and where the Euro, Yen and Franc each traded relative to the US Dollar.

“The PBoC set a weaker [CNY/USD] fix for the fifth consecutive day. To offset the negative impacts from tariffs, we think the PBoC will allow the CNY to weaken further,” says Kristina Clifton, a strategist at Commonwealth Bank of Australia.

Above: GBP/USD at 15-minute intervals, with GBP/EUR and EUR/USD. Click for closer inspection.

“The US‑China trade conflict has well and truly escalated. China said it will 'fight to the end'. China will reportedly impose another package of retaliatory measures including the suspension of fentanyl cooperation, curbs on US services and investigations of US company intellectual property rights,” she adds.

The PBoC raised the central parity fixes and related trading limits for 14 of the 25 currencies in the China Foreign Exchange Trade System (CFETS) Index on Wednesday, with these accounting for around 61.76% of the barometer, perhaps revealing a modest a preference for a limited and controlled depreciation.

These improved fixes favoured European currencies, the Japanese yen and the Hong Kong Dollar, while other Asia Pacific currencies and demoninations from across the Middle East and Africa saw their fixes reduced. The new fixes were all generally reflective of the prior day’s market movements.

“The USD fell by 0.7% during Asian trading. Individualised US tariffs on roughly 60 trading partners and a 104% tariff increase on Chinese imports took effect. Markets continue to focus on the negative impacts of tariffs on the US economy. US equity futures slumped further,” CBA’s Clifton says.

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

The fixes matter for how other currencies each trade against the Dollar because the PBoC's basket-based exchange rate system creates a positive correlation between that and the trade-weighted renminbi, and because Beijing cannot manage the CFETS/CNY pairs without also affecting the CFETS/USD pairs.

The latter is due to the US dollar's intermediary role in determining many of the CFETS/CNY pairs which, together with Beijing's enforcement of trading bands or daily limits in those, creates de facto limits for the related CFETS/USD pairs. These can be inferred from the USD/CNY and CFETS/CNY fixings.

Wednesday’s fixes suggest the following CFETS/USD pairs can rise as far as, or fall in the case of USD/CFETS pairs, the below levels before the PBoC would likely intervene in order to enforce its restrictions for the CFETS/CNY pairs during the European and North American sessions ahead.

EUR/USD: 1.1048/1.1050 (Previous: 1.0988/1.1002), Current Market: 1.1043
USD/JPY: 144.33/144.30 (Previous: 146.53/146.34), Current Market: 145.28
GBP/USD: 1.2881/1.2884 (Previous: 1.2849/1.2866), Current Market: 1.2827
USD/CHF: 0.8424/0.8422 (Previous: 0.8554/0.8542), Current Market: 0.8425
USD/CAD: 1.4155/1.4152 (Previous: 1.4119/1.4100), Current Market: 1.4243
AUD/USD: 0.6000/0.6000 (Previous: 0.6070/0.6078), Current Market: 0.5954
NZD/USD: 0.5569/0.5570 (Previous: 0.6070/0.6078), Current Market: 0.5528
USD/SEK: 9.9180/9.9164 (Previous: 9.9711/9.9577), Current Market: 9.9674
USD/NOK: 10.8293/10.8272 (Previous: 10.8525/10.8379), Current Market: 10.8964
USD/ZAR: 19.6265/19.6227 (Previous: 19.4604/19.4343), Current Market: 19.7664
USD/KRW: 1,462.13/1,461.85 (Previous: 1,453.43/1,451.47), Current: 1,481.65
USD/MXN: 20.7776/20.7736 (Previous: 20.5982/20.5705), Current Market: 20.9165
USD/RUB: 84.2157/84.1993 (Previous: 84.8325/84.7185), Current Market: 86.2800