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Sat, 10th December 2016

Anirudh Sethi Report

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Archives of “special drawing rights” Tag

Yuan’s swift fall fans currency tensions

The yuan is becoming a destabilizing factor in the foreign exchange market amid renewed speculation that China’s authorities would tolerate a weaker currency to support the economy.

The Chinese currency has been depreciating at a faster pace since the end of the National Day holiday period in early October, spurring speculation that it could even hit 7 to the dollar. The trend could throw the market into turmoil by triggering a devaluation war with other Asian currencies. 

 The Chinese authorities sought to hold the yuan’s depreciation in check during a recent string of high-profile events, such as the Group of 20 summit in Hangzhou. The International Monetary Fund also added the yuan to the basket of currencies that make up its Special Drawing Right. 

But now that things are quieter, the yuan has weakened sharply, hitting 6.7 to the dollar.

As the market eyes a possible rate hike in the U.S., the dollar is looking firm. On the other hand, China’s economic slowdown remains a worry. Under the circumstances, there is a growing view that the authorities are inclined to let the yuan fall.

Citigroup predicts the yuan could fall to 7, or even further, against the dollar in 2018. The U.S. bank is not alone: A majority of currency market players expect the yuan to decline against the dollar in the medium to long run.

Sluggish exports

The yuan has tended to move in the same direction as the dollar. When the dollar appreciated through last year, the Chinese currency also strengthened. As a result, the yuan gained value against the euro as well as the yen and other Asian currencies, eating into China’s export competitiveness.

When the dollar began to weaken this year, the yuan followed and depreciated against the yen and other currencies. Keen to avoid a more serious slowdown in the Chinese economy, the U.S. tolerated these trends.

Recently, however, the yuan’s depreciation has accelerated while the dollar appears to have bottomed out. Chinese authorities, evidently, are OK with this.

India- Forex reserves off record high, slump $4 bn to $367.64 bn

After touching a record high, the country’s foreign exchange reserves declined by a whopping USD 4.343 billion to USD 367.646 billion in the week to October 7, the Reserve Bank said today.

The decline was on account of a substantial fall in foreign currency assets (FCAs), a major component of the overall reserves.

In the previous week ended September 30, the reserves had surged USD 1.223 billion to reach a life-time high of USD 371.99 billion.

In the reporting week, foreign currency reserves dipped by USD 4.316 billion to USD 342.394 billion.

FCAs, expressed in US dollar terms, include the effect of appreciation/depreciation of non-US currencies such as the euro, pound and the yen held in the reserves.

Gold reserves remained steady at USD 21.406 billion, the apex bank said.

The special drawing rights with the International Monetary Fund declined by USD 10.4 million to USD 1.476 billion, while India’s reserve position with the Fund dipped by USD 16.5 million to USD 2.369 billion, the apex bank said.

China’s yuan sinks to six-year low, then erases losses

China’s yuan fell to its lowest level in six years early Monday, breaching a key psychological threshold, before erasing the losses on the first day of trading after a week-long holiday.

Traders said the weakening of the yuan reflected strength in the dollar last week, and they did not see any signs of intervention by state banks to support the yuan after it fell.

 In mid-July, when the yuan last breached the 6.7 mark, state banks intervened heavily.

Some China watchers have wondered if any signs of yuan weakness following the holiday would signal that Beijing was putting the currency back on a slow depreciation path after holding it steady through September.

The currency fell after the People’s Bank of China set the midpoint at 6.7008 yuan per dollar, its weakest fix since September 2010 and about 0.3 percent weaker than the setting on Sept. 30, before a one-week National Day holiday.

India’s Forex reserves at all time high at USD 372 billion = Market cap of Facebook

Forex reserves rose by USD 1.2 billion to USD 372 billion, an all-time high, during the week-ended 30 September 2016. Forex reserves crossed USD 370 billion thrice during the month of September.

Foreign currency assets, the largest component of forex reserves, rose by USD 1.5 billion to USD 346.7 billion, a record high, during the week-ended 30 September 2016.

On the other hand, three components of forex reserves declined during the week-ended 30 September 2016. Gold reserves declined by USD 236.4 million to touch USD 21.4 billion. Special drawing rights (SDR) fell by USD 3.3 million to USD 1.5 billion. India’s reserve position at IMF dipped by USD 5 million to USD 2.4 billion.

IMF Special Drawing Right basket gives Yuan a 10.92% weighting

First time the Yuan has been included..

The IMF has announced the weightings for currencies in it’s SDR basket of currencies.  This is the first time the Yuan has been included in the basket. 
Per the IMF website:
“The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. As of March 2016, 204.1 billion SDRs (equivalent to about $285 billion) had been created and allocated to members. SDRs can be exchanged for freely usable currencies. The value of the SDR is currently based on a basket of four major currencies: the U.S. dollar, euro, the Japanese yen, and pound sterling. The basket will be expanded to include the Chinese renminbi (RMB) as the fifth currency, effective October 1, 2016.”
They go on:
“The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions. In addition to its role as a supplementary reserve asset, the SDR serves as the unit of account of the IMF and some other international organizations.”

ECB and China extend currency swap deal

The European Central Bank and its Chinese counterpart have agreed to extend an existing currency swap line between the euro and the renminbi first set up in 2013.

In a deal which will further cement the renminbi’s bid to become an international currency, the swap line has a maximum size of Rmb350bn and €45bn – the same conditions as that first set up three years ago and will be extended for another three years.

The ECB said the swap arrangement “serves as a backstop facility to address potential sudden and temporary disruptions in the renminbi market due to liquidity shortages in euro area banks”, adding:

Liquidity providing arrangements contribute to global financial stability. The arrangement with the PBC is a recognition of the rapidly growing bilateral trade and investment between the euro area and China.

As part of its bid to become a global reserve, the renminbi will be included in the International Monetary Fund’s Special Drawing Rights basket from October 1.

China is the EU’s second largest global trade partner behind the US.

India’s foreign reserve hits record high at $367.76 bn

The country’s forex reserves increased by USD 989.5 million to an all-time high of USD 367.76 billion on the back of a healthy increase in core currency assets, the Reserve Bank said on Friday.
The total reserves had declined marginally by USD 392.6 million to USD 366.77 billion in the previous reporting week. The reserves had touched an all-time high of USD 367.16 billion previously.
Foreign currency assets (FCAs), a major component of the overall reserves, swelled by USD 952.2 million to USD 342.23 billion for the week ended September 2, RBI said on Friday.
FCAs, expressed in dollar terms, include the effect of appreciation/depreciation of non-US currencies such as euro, pound and yen held in the reserves. Gold reserves rose USD 58.1 million to USD 21.64 billion at the end of the reporting week, it said.
The country’s special drawing rights with IMF fell USD 8 million to USD 1.48 billion while the reserve position in IMF was down by USD 12.8 million to USD 2.39 billion, RBI said.

Yuan set to soften again after G-20?

Some currency traders are concerned that the yuan will weaken again after the Group of 20 summit being held in Hangzhou on Sunday and Monday, based on the view that China is keeping its currency stable only until after it hosts the meeting.

The yuan had started to slide around this spring, reaching the weakest level against the greenback in almost six years in July. But it swung upward this summer, ending the downtrend.

 Chinese monetary authorities on Aug. 29 set a stronger reference rate for the yuan against the dollar than market expectations.

“Clearly, the intention is to show that the currency is stable by preventing the yuan from weakening until the G-20,” said an analyst at Bank of Tokyo-Mitsubishi UFJ.

An excessive weakening of the yuan could deal a heavy blow to the global economy just like in August 2015. China surely does not want to draw criticism about its foreign exchange policy at a meeting held on its soil. As the host of G-20 summit, it hopes to show that it is cooperating with other nations to stabilize the currency market, even though it would prefer a weaker yuan since that helps exports.

China marks time in march toward international yuan

In the year since China’s surprise devaluation of its currency, the yuan’s troubles going global have become all too apparent.

With the yuan continuing to lose strength as the Chinese economy slows, Chinese authorities have become reluctant to further expose the currency to market forces — a step necessary to achieve true reserve currency status.

 Last month, the People’s Bank of China gathered local bank executives here for a meeting to inform them of de facto regulations on transactions that could facilitate capital flight. Officials from the central bank reiterated administrative guidance on a prior reporting requirement for large foreign-currency purchases or outbound fund transfers by corporations.

This guidance would not be put in writing, but banks were expected to comply, the officials said, according to people familiar with what transpired at the meeting. Banks were also instructed not to sell foreign currency to companies not registered in Shanghai.

In its 2016 report on internationalizing the yuan, released Wednesday, the PBOC hails rising cross-border transactions and the currency’s progress toward global status. The Chinese leadership, under President Xi Jinping, has set a goal of having “a convertible, freely usable currency” by 2020.

But in a seeming contradiction to this aim, the central bank early this year introduced nationwide restrictions meant to block capital outflows, and has since tightened them. The yuan has been hit with bursts of activity that appear the work of short-sellers. Clearly afraid of letting the currency weaken or allowing capital outflows, the PBOC has put a halt to the liberalization on which the drive for a global yuan depends.

India -Forex Reserves Down By $387.5 Mn To $355.55 Bn

In the week ended March 18, the country’s reserves had increased by USD 2.539 billion to USD 355.947 billion, a record high.

The decline in forex reserves was on account of fall in foreign currency assets (FCAs), a major component of overall reserves.

FCAs dropped by USD 358.1 million to USD 332.146 billion in the reporting week, RBI said in a release today.

FCAs, expressed in dollar terms, include the effect of appreciation and depreciation of non-US currencies, such as the euro, pound and the yen, held in the reserves.

Gold reserves remained unchanged at USD 19.325 billion in the week.

India’s special drawing rights with the International Monetary Fund (IMF) dipped by USD 10.7 million to USD 1.488 billion, while the country’s reserve position with the Fund was down by USD 18.7 million to USD 2.599 billion, RBI said.