Do foreign exchange dry reading: Papers Detailed RMB exchange rate level of counter-cyclical factors: composition, effectiveness and impact

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Lead: when the effectiveness of counter-cyclical factors appear?

Wen | Zhang Lu Zhong Zhengsheng source | Monita macro research, ID: cebmmacro Edit | Poker investor, please indicate the source

2017 Nian 5 26, the central bank announced the introduction of “counter-cyclical factor” in the RMB exchange rate quoted model, then the yuan against the dollar has appreciated nearly 26 points, contributed so far this year, the appreciation of the magnitude of nearly 80
%.
Initially, the market generally believes that the introduction of counter-cyclical factor is nothing more than the central bank some flexibility to enhance operational, and add some ambiguity in the calculation only.
Ease foreign exchange market so-called “herding”, but also increased the central bank’s discretionary space, but in reality a step backwards for the reform of the RMB exchange rate market.
For all sorts of discussion of the market, the central bank in the second quarter execution report August 11 release of monetary policy in special provision column Detailed counter-cyclical factor, for the first time disclosed the calculation method of counter-cyclical factors in more detail.

Given the current capital market awareness of counter-cyclical factor is still relatively vague, Based on the analysis of the current constitution of the yuan central parity, trying to answer the following questions: 1, counter-cyclical factors acting on the central parity
which component pricing?
2, the effectiveness of counter-cyclical factors show under what circumstances?
The central bank’s room for discretion is reflected in where?
3, how to understand as a counter-cyclical one kind of new foreign exchange intervention factor?

We believe that the new counter-cyclical factor is a means of managing exchange rate of the central bank, as of now their role is mainly reflected in promoting the appreciation of the RMB against the US dollar (especially intuitive for the dollar index fell RMB
the time when the exchange rate rose).
Short-term counter-cyclical factor for the mitigation of the loss of China’s foreign reserves, the RMB exchange rate is expected to unilateral differentiation, obviously useful; but in the long perspective of the RMB exchange rate market-oriented reforms of view, the introduction of the exchange rate is at least not a market-oriented reform
forward foreign exchange reform is still unfinished business.

reverse cycle factor which acts on the component?

is introduced immediately before the reverse cycle central parity mechanism factor, a two-part “Closing Rate + a basket of currencies change.”
2016 Spring Festival, this “two-wheeled” rule formally established, the central parity of RMB against the US dollar is “on the basis of the previous day’s closing rate on direct plus keeping the yuan against a basket of currencies 24 hours required for stable RMB against the US dollar
bilateral adjustment. ”
February 20, 2017, foreign exchange trading center for a technical fine-tuning the rules above, in order to avoid double counting of component daytime basket of currencies changes, the line will offer to calculate a weighted basket of currencies exchange rate of the time period be shortened from the past 24 hours
for the last 15 hours, that is from the front at 16:30 on the 1st day to 7:30.

namely:

= central parity of RMB against the US dollar the previous day’s closing price + a basket of currencies exchange rate changes night * adjustment factor …… (1)

2017 Nian 5 26, the central bank announced the introduction of “counter-cyclical factor” in the above model.
According to the central bank explained, quoted line “factor in the calculation of counter-cyclical impact can start on the day’s closing price volatility than the central parity of the currency changes excluded basket, whereby changes in exchange rates mainly reflect market supply and demand, and through countercyclical
adjustment coefficient obtained ‘counter-cyclical factor’, “” counter-cyclical factor quoted by the line change according to economic fundamentals, such as the degree of pro-cyclical foreign exchange market set their own. ”
Represented by the formula:

= reverse cycle factor market supply and demand factors / inverse cycle coefficient = (closing price of the previous day – against the central parity – a basket day exchange rate adjustment factor *) / inverse periodic coefficients

key mathematical ideas

the inclusion of counter-cyclical factor is the change in the day’s closing price of dismantling become “a basket of currencies exchange rate changes during the day factors” and “market supply and demand factors renminbi” in two parts
and then on the “supply and demand factors yuan in the market” in counter-cyclical adjustment, the foreign exchange market to weaken the herding.

market supply and demand factors in this dismantling idea:

= against the closing price of a basket against the central parity + * day exchange rate adjustment factor market supply and demand factors + < / p>

to the new mathematical approach to the central parity respectively into the front and rear of the formula introduced into the reverse cycle factor is obtained:

before the introduction of the inverse cycle factors:

< after p> = central parity of RMB against the US dollar central parity against a basket of currencies + 24 hours of exchange rate changes * adjustment factor market supply and demand factors +

introduction of counter-cyclical factor:


central parity of RMB against the uS dollar central parity of the previous day = 24 hours + a basket of currencies exchange rate adjustment factor * + market supply and demand factors / counter-cyclical factor …… (2)

so, we can compare
clearly see the mechanism of action of counter-cyclical factors.
In simple terms, it is to first extract the supply and demand factors previous day’s close of RMB exchange rate changes in the market through mathematical treatment, then filtered discount on this component.
And indeed as the central bank emphasized, ” counter-cyclical factor ‘to calculate all the data involved in the process, or from the open market, or by the quote line discretion, without third party intervention. ”

The central bank made this adjustment background and purpose is obvious.
This year April 14 to May 12, the dollar index fell to 99.2 from 100.5 shocks, while the central parity of RMB against the US dollar to appreciate not only No, but from 6.874 depreciated by more than 208 points (Figure 1).
By then, the dollar index just off the high of “Trump market”, continued downward trend has not been established since.
If the yuan-dollar exchange rate can not be in time for the appreciation of the US dollar index weakened timely, then in accordance with the experience of last year, the dollar index strong shocks, once in favor of the dollar index rebounded against the dollar in turn once again approaching the critical point 7.
During this test a fine reason for the yuan “contrarian” depreciation, mainly brought about by market forces of supply and demand factors devaluation is too strong, the dollar reversed out changes brought about by the appreciation of the power, which is the central bank official said the “unilateral
self-reinforcing market expectations. ”
For this reason, the central bank introduced a counter-cyclical factor for the market supply and demand factors appropriate filter, intended to remediate the problem can not be effective against the dollar appreciation.

the effectiveness of counter-cyclical factor when it appeared?

From the above equation, to establish a relatively simplified prediction model RMB against the US dollar price.
Backtesting found: counter-cyclical factors had been introduced or quote model’s offer in May 15; the basic model we built can accurately fit the actual trend of the RMB against the US dollar central parity, which we in the first part of the renminbi
analysis of the central parity formula is tenable.

It should be noted that the two central parity adjustment factor in the equation is we do not know: one adjustment coefficient reference section of the exchange rate basket, the other is “based on economic fundamentals and foreign exchange markets
cis-degree cycle “inverse set periodic coefficients.
Both coefficients are determined by the offer of independent lines.
The central bank room for discretion in setting the central parity of RMB against the US dollar in that: its central parity rate against the US dollar quote quote lines weighted average of 14 yuan, while the corresponding weight for the market is a “black box.”
We carry out these two coefficients of a simplified process: 1, assuming that (1 / counter-cyclical factor) = adjustment factor; 2, the use of the actual change in the central parity inverted to calculate the adjustment factor, using Equation (1) before May 15, 5
after 15 months using the equation (2); 3, respectively, taking the average of the two periods as the respective adjustment factor.
From the fitting point of view, this approach does not simplify too much compromising the accuracy of the model.

Contrast introduction of counter-cyclical factor of whether or not the central parity of RMB against the US dollar fitting result, we have found two ways:

First, more than three since May 15
months before and after the central parity model, adjusted only on May 16-25, June 19-27, July 20-26 in three time periods there have been significant differences, namely the use of the old central parity trend of formula
continuously weaker than the actual central parity (FIG. 2).
Further, the three time periods, without exception, are the projection of the depreciation of the market forces of supply and demand factors: supply and demand factors market-determined yuan against the US dollar depreciation, more than the usual range of less than 500 points (Figure 3).
Analyzed above, the market supply and demand factors here is the change in the closing price of the previous day, after excluding the impact of currency exchange rate changes resulting in a basket of the day, namely: market supply and demand factor = the previous day’s closing price – the previous day the central parity
– a basket of currencies exchange rate changes during the day * adjustment factor.

Second, the opposite is, in the appreciation of the power supply and demand factors in the market stage projections, for example, on June 1-2, June 28-30, passion surging out of the foreign exchange market, 8
(introduction reverse cycle factor) 9-11 months, and most recently 30-31 August, central parity with the new formula, to a significantly weaker than the old formula (reverse cycle before introduction factor) calculated central parity (
Figure 4).
In other words, compared to the market supply and demand do not filter the old formula, calculated according to the new central parity formula should appreciate less.
However, from a practical point of view the trend of the central parity, which change or more fully reflects the appreciation of the power supply and demand factors in the market, which is reflected in the central parity of RMB against the US dollar the actual quote seems to follow her husband back in style.

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based on these findings, we
speculation, the current counter-cyclical factor only in the market devaluation expectations too high (or too one-way market supply and demand to focus on when purchasing foreign exchange), will help to show the effectiveness of the US dollar against the RMB exchange rate stable (or at least but fast devaluation) of.
Once the RMB exchange rate appreciation against the previous supply and demand in the market, the expected depreciation of the RMB exchange rate will be quickly corrected.
At this point, not to join counter-cyclical factor will again return to the old formula is consistent with the new formula introduced counter-cyclical factors.

So far, the expected appreciation of the RMB exchange rate in the market is more concentrated when counter-cyclical factors play a role yet to weaken the yuan’s appreciation.
This may have two reasons: First, market maker for yuan appreciation expectations and counter-cyclical factor expected depreciation of the set is not the same, the adjustment to the appreciation of direction is much smaller than the depreciation direction (June 1-2 and August 9
– on the 11th may be more the case); Second, the central bank intends to promote more moderate appreciation of the yuan, while market maker weaken the power of appreciation, the central bank chose to let the yuan appreciate more fully (August 30 may be more the case
).

change

As the role of counter-cyclical factor “market supply and demand factors” in the middle price formulas central bank foreign exchange market intervention, the central bank intervention in foreign exchange market
also entered a new stage.
Prior to the introduction of counter-cyclical factor, bring the power of market supply and demand nothing less than the devaluation of the RMB has two exits: First, the central bank’s foreign reserve depletion of foreign exchange intervention, direct management of market supply and demand; Second, the central parity of RMB against the US offset formula
maintained a stable exchange rate against a basket of currencies of power, making the RMB exchange rate index CFETS devaluation.
After the introduction of counter-cyclical factors, the central bank now have one more tool to manage the resulting market forces of supply and demand devaluation that previously described by counter-cyclical filter coefficients for the discount.

According to the above framework, review the situation sort of sharp depreciation of the RMB exchange rate since November 2015, will help us understand the relationship between the three foreign exchange supply and demand management (Figure 5).

2015 Nian 11 Month – January 2016, when companies seek to repay dollar debt, China’s banks on foreign exchange settlement showing a large deficit, the foreign exchange market supply and demand factors clearly point to the devaluation
(Figure 6).
That time, consume a lot of central bank foreign reserves to balance the market supply and demand (due to the disturbance of foreign exchange currency changes against the dollar, foreign exchange we use to measure the central bank’s foreign reserve depletion), but failed to fully eliminate its effects, leading to a RMB
basket of currencies also depreciated.
At that time framework “+ closing rate to a basket of currencies change” is not yet stable form.

2016 Nian 2 Month – June 2016, corporate foreign debt repayment of US dollar bottomed out, coupled with tightening of exchange controls, banks on foreign exchange settlement deficit narrowed significantly negative market forces of supply and demand eased
.
At this time, the central bank also significantly reduced the consumption of foreign reserves, mainly by market supply and demand factors devaluation of the RMB exchange rate index of catharsis CFETS.

2016 July – What’s in January 2017, the central bank has increased the consumption of external storage, the cost of this was to achieve a smooth volatility this stage CFETS RMB exchange rate index.

Since February 2017, thanks to further strengthen capital controls and weakening of the dollar index, China’s banks on foreign exchange settlement account deficit reduced to a low level, the impact of market supply and demand factors will significantly
the good, the central bank once again reduce the consumption of foreign exchange reserves.
Prior to the introduction of counter-cyclical factors, the central bank catharsis affect market supply and demand by the depreciation of the RMB exchange rate index CFETS; after the introduction of counter-cyclical factor, by means of counter-cyclical coefficient of effective filtration, CFETS RMB exchange rate index show a pattern of steadily.

can be seen, to some extent reverse cycle factor may alternatively be formed of external storage consumed, help to reduce the outflow of foreign exchange at the same time, achieve a stable RMB basket of currencies.
Simple to understand, more than a way to manage the supply and demand of foreign exchange, more naturally resistant layer umbrella external imbalances.
Even if the subsequent stronger dollar and other factors lead to capital outflows renewed pressure, filtered through counter-cyclical factors, the central bank foreign reserves consumption direct regulation, the yuan against a basket of catharsis currency devaluation, these three forces shared more help to avoid unilateral devaluation of the renminbi
expected to gather again.

< p> not when the RMB exchange rate reform actually

counter-cyclical factor is a new means of Central Bank Governing RMB exchange rate, as of now their role is mainly reflected in the promotion of the appreciation of the RMB against the US dollar
(especially intuitive for the dollar index fell upon the exchange rate of the rose).
From the perspective of long-term market-oriented reform of RMB exchange rate point of view, it is not least the introduction of forward exchange rate market-oriented reforms.

However, always advisable and see the amount, as we analyzed in this article, the short-term counter-cyclical factor for the mitigation of the loss of China’s foreign reserves, the RMB exchange rate is expected to unilateral differentiation, obviously helpful
; and only when the external imbalances are better stabilize inside the Chinese economy deleveraging, risk prevention, as have greater space.
In retrospect, the beginning of this year China’s capital outflow pressure is still worrying the occasion, who can clearly glimpse “Trump deal” will die a natural death?
Who can accurately predict the dollar index will “boom-bust”?
Who can proactively pointed out that the RMB exchange rate, “the rise and rise can not be” embarrassing?

yuan central parity mechanism of timely and appropriate adjustments to do, is definitely not a “time for space” excuse.
In breaking new moon blurred external environment, internal innovation flourish in breeding, who said, “to the point of the sun, it is not brilliant”!
?
The introduction of counter-cyclical factors, the reform of RMB exchange rate, up RMB exchange rate ups and downs, perhaps only to “Gou Nisshin, Japan Nisshin also Nisshin” to describe.
One of the merits and demerits, leaving history to comment!

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