Can Corporates gain from China’s lead role in the Central Banking soap opera?

FX in the Age of Central Bank Activism.  Photo: www.english.cri.cn

FX in the Age of Central Bank Activism.  Photo: www.english.cri.cn

Have we ever lived at a time where central banks garner a bigger share of the limelight than they do today? It seems that not a day goes past without some monetary policy announcement affecting business decision making around the world. It is almost like Carney, Yellen and co. are in their very own central banking soap opera. And currently, there is no sub-plot more gripping than the Chinese governments continuing influence on the yuan.

Until this year, frequent swings from investor speculation on whether the yuan will appreciate or depreciate have been the most familiar tale. But there has been somewhat of a page-turner recently: with the yuan firming up against the dollar after its Central Bank lifted its guidance to the strongest level in 10 months. This now leaves the market with no real consensus to how far the yuan could rise, as it all really depends on whether companies look to sell more dollars.

Clearly, China’s changes to the way it calculates the yuan’s daily reference rate against the dollar are starting to take a positive effect on the market. After years of investors trying to pull their money out of the region, there is now a lot more certainty about the yuan’s trajectory, which should help with deal flow – and can only be good news for corporates wanting to execute inbound and outbound business.

Data is, of course, only as good as the source in which it comes from.

While this is all well and good, in this modern central banking drama, there are multiple twists and turns to consider. Take, for example, the new guidelines that can alter a reference rate at any given time based on the Central Bank’s decision. While the People's Bank of China may choose to only follow its own rules, others like the European Central Bank (ECB) publish their rates based on recommendations determined on benchmark-setting processes from ESMA. Ultimately, this is a challenge for any business exposed to both the euro and yuan, as inconsistencies will emerge between the same currency pair across two central bank rates.

This emphasizes why it is so important for corporates in this position to ensure that they have a wide range of information to draw on to get a true market price. Data is, of course, only as good as the source in which it comes from.  Fortunately, technology has evolved to the point where exchange rate APIs can be integrated directly into a firms’ ERP, accounting, or treasury systems as well as financial management platforms—meaning a wider range of rates data is now available to accountants, financial directors and CFOs alike.

So the story of the yuan becomes clearer for now: a more complex central bank environment with different monetary policy stances equals greater potential risks. For corporates to manage through the current situation and prepare for future challenges, they must look beyond reference rates. Then, and only then, will they be able to get a fully aggregated view of their market risk position. Those corporates that don’t stick to the same old story of central bank reference rate reliance may just find that this particular tale has a happy ending.