Some background on the yuan fix each day from the People’s Bank of China and why its so unpredictable at present
PBOC says the rate is determined by:
- the yuan's last closing level
- moves in a basket of global currencies
- Considerations of market supply and demand
Analysts say it's the last of those factors that gives the PBOC discretion on where to set the rate each day
"They will continue to influence the next day's fixing depending on their subjective assessment of the market demand and supply, and in terms of whether the market direction is too one-sided," said Roy Teo, a Singapore-based senior foreign-exchange strategist at ABN Amro
Sue Trinh, the Hong Kong-based head of Asia foreign-exchange strategy at RBC, estimates the fixing by adjusting the previous close with movements in other currencies and making a "judgment call" on demand and supply factors. ... "That element of discretion is throwing off a lot of models at the moment"
Adds Bloomberg:
The disconnect is fueling speculation that Chinese authorities have reverted to their old approach of using the reference rate to guide moves in the yuan, backtracking on pledges to make the currency more market-driven
I agree, and have been saying so since last week's turmoil set in.
More (bolding is mine):
"The real significance of the fixing is that the PBOC can use discretion to set it at a level that it wants, and it's not completely transparent," said Zhou Hao, an economist at Commerzbank AG in Singapore. "The central bank can use it to deliver a safety card, or a bomb, or whatever else that you don't expect."
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The trick with models in financial markets is not only setting them up right, but knowing when not to use them.
