PBOC Puppets US Markets Higher

Steve Kanaval  |

Eliminating a failed circuit breaker mechanism that halted trading twice this week, the (PBOC) People's Bank of China raised its guidance rate for the Yuan for the first time in nine trading days allowing US Futures markets to bounce 150 Dow points. Currency policy makers in China continue to puppet global stocks as the world watches global volatility in world markets.

Chinese markets have had a tricky start to 2016, buffeted by the PBOC's lower yuan fixings against the dollar, two days of stock exchange suspensions, weak factory and service sector surveys, and concerns about looming share sales by major stakeholders once a ban on such sales expires. The PBOC seems more influential in global market volatility than any force on the planet.

With the stocks circuit breaker deactivated late on Thursday, as markets closed up 2 percent on Friday. These indexes lost around 12 percent in the first four trading days of 2016, essentially giving up all the gains made in 2015. The circuit breaker, which only came into effect on Jan. 4, came under fire for kicking in too soon. The effect was a rush to sell before a second trigger halted the day's trade permanently.

To calm currency markets, the PBOC set its daily midpoint rate for the Yuan prior to market open, firmer than Thursday's fix. China's currency allows the range to deviate 2 percent either side of the midpoint. The yuan firmed during the day, with dealers suspecting that the central bank intervened through state-run banks to support its currency, which could help allay fears that any depreciation would be allowed to continue.

After its sharply lower fix on Thursday, the PBOC intervened heavily to defend the yuan in offshore trade, reversing a decline of more than 1 percent that took it to a record low. That left dealers at a loss to know what were the central bank's aims. "Market volatility this week suggests that nobody really knows what the policy is right now. Or if the government itself knows or is capable of implementing the policy even if there is one," said DBS bank. "The market's message was loud and clear, that more clarity and less flip-flopping is needed going forward."

Markets will remain wary of China's currency goals, as mixed messages come from the central bank. Many market watchers on Thursday observed that the PBOC is under increasing pressure from policy advisers to let the currency fall quickly and sharply, by as much as 10-15 percent, as its recent gradual softening is thought to be doing more harm than good. A flurry of Chinese economic data in the coming weeks is likely to show that economic activity continued to slow in December, adding to concerns about the outlook for 2016, and lets not forget U.S. unemployment numbers due out this morning.

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