Beijing announced on July 21 that the de facto peg against the dollar, an arrangement that has been in place since 1994, would be removed with immediate effect. US Dollar vs the CNY will now be managed as a managed-float centered around a daily People’s Bank of China rate (akin to the Reserve Bank of India) announced at the market’s close, and spot US Dollar /Chinese Yuan will be allowed to trade within a +/-0.3% band around this central parity rate. The PBoC rate for July 21 was 8.11. This marked the central parity rate for USD/CNY trade that day (translating into a 8.0857-8.1343 band) and constituted a modest 2% revaluation on the currency, which was well short of the U.S. call for at least 10 percent. The principles behind this policy change was communicated by the PBoC as a move towards facilitating the exchange rate flexibility so that adjustments to the currency could be made based on the market conditions and with reference to a basket of currencies. The PBoC also maintained that the CNY exchange rate band would be adjusted when necessary in accordance to market and economic developments.
The domino effect shaped up in the rapid collapse of USD/Asian rates. While the USD/Japanese Yen plunged 2 big figures to the low-110s on the release , USD/KRW led the regional decline. USD/SGD also slipped,
with spot declining 2%. USD/THB also traded lower though in most currencies markets were closed.
Following the People’s Bank of China move, Malaysia announced that it would allow the ringgit to move to a managed float in place of the USD peg. Which means that Malaysia will monitor its exchange rate against an undisclosed currency basket representing a trade-weighted index of major trading partners. In a separate statement, PM Badawi stated that unpegging the currency will not hurt exports and the MYR will not trade “too far” from the former peg level. However, following the revaluation of the Chinese Yuan Indian bonds opened stronger on the expectation that a stronger INR on the back of the CNY revaluation would help lower inflation. Nevertheless, strong intervention by the RBI caused a reversal in USD/INR back to prerevaluation levels, which, along with higher than expected WPI inflation and comments from Ministry of Finance officials that government issuance will proceed despite the government’s large cash surplus, hurt sentiment and removed the bid from investors. On the whole, Indian bonds closed the day almost unchanged.