China has introduced a new way of managing its exchange rate; in the near-term, it should allow the renminbi to move up "moderately" against the dollar, the Swiss bank says.

China’s new system to managing the exchange rate of the renminbi against the dollar should allow the currency to appreciate at a moderate pace against the greenback, but any decline in the dollar’s value will be temporary because of longer-term forces at work, Swiss private bank Pictet said in a recent note.

A week ago, the People’s Bank of China brought in “counter-cyclical adjustment factor” to calculate the daily dollar/renminbi reference rate (the “fixing rate”). The previous formula used two factors: the spot close of the previous day and an adjustment factor taking into account overnight changes in demand and supply in the foreign exchange markets. The PBoC’s justification for the inclusion of this third factor, the CCAF, is to increase the weighting of macroeconomic fundamentals in the exchange rate price quotation.

“In our view, under this new fixing mechanism, the renminbi is likely to appreciate moderately against the US dollar in the current weak US dollar environment,” Pictet said in a note late last week. “This should also stop the ongoing decline of the renminbi index. The divergence between the performance of the US dollar index and the USD/CNY rate suggests scope for some catch-up, especially as the CNY has lagged other Asian currencies and Chinese macroeconomic indicators remain generally positive,” it said.

“For the longer term, we continue to believe the PBoC’s goal is to keep a stable renminbi on a trade-weighted basis. Given our positive take on the US dollar for the remainder of the year, the decline in the USD/CNY rate should be temporary, irrespective of fixing mechanisms,” it said.

Although the new approach will give the Chinese central bank more control over the currency, the exchange rate is still largely market-driven, the bank said.

It is unlikely, as a result of the new system, the likelihood that the dollar/renminbi rate will go above the 7.00/$1 threshold in the next 12 months has declined quite significantly, Pictet added.