Chinese Yuan’s 10-Day Volatility Dropped to Lowest since 2010

On Monday, November 6, the Bank of China very slightly adjusted the official yuan (USDCNY) exchange rate, ignoring its ongoing strengthening against the dollar. It looks like the Chinese regulator tackles to contain the official exchange rate in a very narrow range, as a result of which its 10-day volatility fell to the lowest level since 2010.

However, in the past, periods of such stability of the yuan often foreshadowed significant fluctuations in its exchange rate. If the Bank of China relaxes its control over the yuan exchange rate, bears may see this as an opportunity to bet on its upcoming downward correction. However, this would unlikely to happen before USDCNY falls below 7.15.

For much of this year, the Bank of China has been trying to stabilize the yuan, which, at some point, had dropped to a 16-year low against the USD. In the spring of 2022, there was a similar current period of stability of the yuan, but then USDCNY soared by almost 7% in a month. Back then, the main reason for the sharp correction of Renminbi was a sharp deterioration in investor sentiment due to Beijing's anti-commodity-export policy. Despite some benefits of yuan devaluation for the country's economy, Beijing fears that too much and too rapid weakness of the national currency would provoke accelerated capital outflow.

Without these support measures, USDCNY could have easily spike above 7.50. According to Société Générale’s forecast, the pair will end 2023 at 7.45.