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14 Dec 2015
China’s New Renminbi Index - Deutsche Bank
FXStreet (Guatemala) - Analyst at Deutsche Bank explained that on December 11th China’s Foreign Exchange Trade System (CFETS) published a new CNY effective exchange rate (CNY CFETS basket).
Key Quotes:
"According to the CFETS statement, the intention was to “shift how the public and the market observe RMB exchange rate movements”. In their view, “the bilateral RMB- USD exchange rate is not considered a good indicator of the international parity of tradable goods”. Rather it is more appropriate to gauge RMB performance against both the USD and the basket of trade weighted currencies. They stated that “a basket of currencies can better capture the competitiveness of a country's goods and services, and better enable the exchange rate to adjust”."
What do we know about the new index?
"According to the document released by CFETS1, the index comprises of 13 currencies and the weights are based on trade relationships, adjusted for re- export trade factors. For now it would seem the weights are static but could evolve in the coming months, particularly if new currencies are included on the CFETS platform. In terms of FX rates used for calculating the index, they are based on “the daily CNY Central Parity Rate and CNY reference rate.” In our view, these rates are likely to be the 9.15am USD/CNY fix, and the respective reference midrates for CNY against other currencies on the CFETS platform. The index is based to 100 on 31 December 2014.
Apart from the CNY CFETS basket, the authorities will also release CNY BIS and SDR basket indices. For FX rates that are not available on CFETS platform, the authorities will use the cross currency FX rate between daily USD/CNY central parity rate and FX spot rate of the currency against USD.
Again these indices will be rebased to 31 December 2014. As shown as Figure 1, the CNY BIS and CFETS basket tend to trend similar with one another despite the difference in basket composition (see below for more details). On the other hand, the SDR basket is more volatile as it based on a narrower concentration of currencies, with a greater weight on the USD."
Key Quotes:
"According to the CFETS statement, the intention was to “shift how the public and the market observe RMB exchange rate movements”. In their view, “the bilateral RMB- USD exchange rate is not considered a good indicator of the international parity of tradable goods”. Rather it is more appropriate to gauge RMB performance against both the USD and the basket of trade weighted currencies. They stated that “a basket of currencies can better capture the competitiveness of a country's goods and services, and better enable the exchange rate to adjust”."
What do we know about the new index?
"According to the document released by CFETS1, the index comprises of 13 currencies and the weights are based on trade relationships, adjusted for re- export trade factors. For now it would seem the weights are static but could evolve in the coming months, particularly if new currencies are included on the CFETS platform. In terms of FX rates used for calculating the index, they are based on “the daily CNY Central Parity Rate and CNY reference rate.” In our view, these rates are likely to be the 9.15am USD/CNY fix, and the respective reference midrates for CNY against other currencies on the CFETS platform. The index is based to 100 on 31 December 2014.
Apart from the CNY CFETS basket, the authorities will also release CNY BIS and SDR basket indices. For FX rates that are not available on CFETS platform, the authorities will use the cross currency FX rate between daily USD/CNY central parity rate and FX spot rate of the currency against USD.
Again these indices will be rebased to 31 December 2014. As shown as Figure 1, the CNY BIS and CFETS basket tend to trend similar with one another despite the difference in basket composition (see below for more details). On the other hand, the SDR basket is more volatile as it based on a narrower concentration of currencies, with a greater weight on the USD."