PBOC: Change in CNY reference rate setting method - BBH

Analysts at BBH note that there was an important announcement in Asia and it was from the PBOC and it regards how the yuan's reference rate is set.  

Key Quotes

“Last year, officials had introduced a "counter-cyclical" component to ostensibly dampen the volatility and downside pressure.  Previously the "fix" was said to be determined by the previous day's close, the subsequent movement against a basket of currencies, and this counter-cyclical element that was meant to offset sentiment any "herd" behavior.  This added an unknown (that could not be quantified) into the mix, making the process less transparent, but apparently giving officials the tools to resist market pressure.    Officials said that the "counter-cyclical" component has been dropped.”

“The way the announcement read suggested that the new policy had already been implemented, and in any event, the yuan weakened.  USD/CNY approached its lowest level in four months yesterday before rallying, posting what appears to be a key reversal and extending those gains today.  The US dollar rose a little more than 0.33% against the yuan today, the most in two months.  The yuan appreciated 6.75% against the dollar last year and reserves have been gradually rebuilt over the past 11 months.”

“Moreover, important trade issues with the US will come to the fore in the coming weeks.  Leaving aside economic and financial influences, it ought not to be surprising if China seeks to stabilize the yuan and not give what some may see as a concession to the US by allowing it to accrue whatever advantage there may be in a weaker currency.”