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Record low USDCNY fixing signals China’s focus to curb inflation

Tuesday’s fixing of the USDCNY reference rate at a record low 6.3425 by the People’s Bank of China (PBoC) shows the nation’s policymakers remain firmly focused on controlling inflation.

The move also quells any suspicions that it may be reconsidering re-pegging the RMB to the US dollar. The PBoC set its daily USDCNY reference rate 124 pips lower at 6.3425, the fifth consecutive lower fix and a record low since the 2005 revaluation.

The stronger-than-expected daily fixing, which was 0.2 stronger than Monday’s rate, suggests China’s immediate concerns lie with tackling import-fuelled domestic inflation through currency appreciation, according to analysts at Standard Chartered and HSBC.

Inflation levels in China are still high, with 6.1% annual inflation in September.

This sends a clear signal that China will not change the course of its exchange rate policy, says Paul Mackel, head of Asian FX strategy at HSBC. “The recent appreciation and [Tuesday’s] unexpectedly strong fixing should quell recent speculation that China might re-peg its currency to the dollar amid financial market uncertainty and fears of a Chinese hard landing,” he says.

There has been some recent speculation that China may re-peg to the USD, as market uncertainty surrounding the eurozone intensified, with some prominent analysts suggesting such a move was not an improbable scenario. China last re-pegged to the USD in 2008, after the collapse of Lehman Brothers, and some analysts have said that rising risks of a eurozone fallout could have a similar effect.

HSBC expects the PBoC to allow continued CNY appreciation versus the US dollar rather than hike interest rates to reduce inflation. “We think the tightening cycle is done for the moment, but with the domestic price level still elevated in China, from a currency perspective, incremental appreciation will help fight some of that inflation,” adds Mackel.

In addition to curbing inflationary pressures, China may also be feeling inclined to continue to allow its currency to appreciate in response to political pressure ahead of the G20. The recent Currency Exchange Rate Oversight Reform Act in the US, informally known as the China Currency Bill, would allow the US to impose tariffs on another country if its currency was found to be misaligned.

“The key reason why we expect more CNY appreciation is due to inflation concerns and also geopolitical considerations ahead of the G20 meeting in November,” says Thomas Harr, head of Asian FX strategy at Standard Chartered.

Standard Chartered expects further downside from current levels, forecasting USDCNY at 6.31 by the end of the year.

The PBoC move may also be interpreted as an attempt to maintain stability in Asian FX more broadly, as CNY generally provides some anchoring to Asian currencies.

“In September, it was extraordinary how strongly [PBoC] fixed CNY, given how much the dollar rallied and how much Asian FX sold off,” says Harr. “The record low fixing can be interpreted as an attempt to clearly indicate China’s exchange rate policy and maintain some stability in Asian FX more generally, given the fragility of emerging market currencies witnessed last month.”

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