Dollar At One Month Lows On PBOC Advisor Comments That Chinese FX Formation Mechanism Needs "Drastic" Reform

Tyler Durden's picture

Appeals for changing the fixed CNY exchange mechanism are now coming not only from the office of Chuck Schmuer. In a column in China's Caixin website, Zhou Qiren, a central bank advisor, said that China's yuan exchange rate formation mechanism needs drastic reform. "The central bank has used too much money to intervene in the foreign
exchange market, so modest reform is not going to help
," said Zhou, a
member of the Monetary Policy Committee under the People's Bank of
China, in his special column on the Caixin website. "We need drastic measures," he said. Zhou said the growth of China's monetary base is largely decided by the
central bank's purchase of foreign exchanges, which in turn is fueling
inflation. The comments resulted in dollar weakness overnight as soon as they hit the wires, sending the DXY to one month lows of about 73.616, a level last seen on May 5. The statement offset some carry currency weakness overnight after the RBA decided to keep rates unchanged at  4.75% in a widely expected decision, though a hike is still thought likely in coming months to combat inflation amid a massive trade and mining boom. Additionally, courtesy of further rumormongering out of Europe, which today has been with a EUR-bullish bias, the EURUSD has continued its uptrend, and is now also trading at one month highs, appreciating by 700 pips since recent lows of under 1.40 on May 23, last printing at 1.4666. As usual, Greek newsflow will dominate the EURUSD, and thus, the general market.

From Market News:

China's yuan exchange rate formation mechanism needs drastic reform, Zhou Qiren, a central bank advisor said in comments published on Tuesday.

"The central bank has used too much money to intervene in the foreign exchange market, so modest reform is not going to help," said Zhou, a member of the Monetary Policy Committee under the People's Bank of China, in his special column on the Caixin website.

"We need drastic measures," he said.

Zhou said the growth of China's monetary base is largely decided by the central bank's purchase of foreign exchanges, which in turn is fueling inflation.

"The cost of the central bank continuing to buy U.S. dollar to maintain a steady yuan-dollar rate is too high. It's inevitable that we must reform the yuan exchange rate regime, otherwise our economy will always be in turmoil," he said.

But the central bank advisor said a major yuan reform doesn't mean there will be sharp change of yuan exchange rate.

"As long as other institutions can replace the central bank in buying U.S dollars, the yuan exchange rate level can remain unchanged," Zhou said.

Economists have suggested that the Ministry of Finance replace the central bank in purchasing foreign exchange in the interbank market.