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Foreign Exchange

Latest CNY fixing may herald a more domestic focus by China; CNY rise may quicken

The latest CNY fixing saw the yuan strengthen beyond the 6.4 per dollar mark for the first time in 17 years, while the 4-day cumulative 460 pip move lower in the fixing, was the second biggest over that time frame, following a slightly bigger adjustment last September. According to the most ardent observers of China’s currency policy, it represents a significant shift in policy.

What seems to have taken the market by surprise is the fact that during the past week, in very volatile market conditions, the recent US dollar weakness trend has stabilised, thus making it less clear why the fixing would be set as low as it was.


According to analysts at HSBC, while macro economic factors such as higher inflation, and wider trade surplus have supported a faster pace for CNY appreciation, it is domestic politics that is becoming a more important driver of its currency policy.


Last week’s US sovereign rating downgrade by Standard & Poor’s and the potential for a third round of quantitative easing has stoked real debate in China as to the broader costs and benefits of China's choice of exchange rate policy, HSBC argues in a note published today (11 Aug).


Moreover, alongside recent domestic discontent, that may have been enough to shift FX policy away from the previous stance, by becoming more permissive and lessening the requirement for such large accumulation of dollars, they conclude.


Meanwhile Standard Chartered says that the strong fix sends a clear signal from the People’s Bank of China (PBoC) that China remains confident in the strength of its domestic economy, and has acted as a beacon of strength for Asia ex-Japan currencies.


The yuan is the sole gainer this month among Asia’s 10 most-used currencies excluding the yen, having advanced 0.7 percent versus the dollar as a Standard & Poor’s downgrade of the U.S. credit rating and a rout in global equities prompted investors to pull back from riskier assets. The MSCI Emerging Markets Index of shares dropped 14 percent since July.


Standard Chartered maintains an overweight short- and medium-term FX rating on CNY. They play down concerns about too much CNY appreciation; because on a trade-weighted basis it remains below its June 2010 de-peg level. They add that opportunities still exist for investors to position for CNY strength, as CNY forwards have been cheapening since April and underestimate the likely appreciation.

 Limited appreciation priced into forwards

USD-CNH, USD-CNY NDF, USD-CNY onshore

 
 Sources: Reuters, Bloomberg, Standard Chartered Research

The International Monetary Fund said last month a stronger yuan would help stabilize the global economy, as well as aid government efforts to tame inflation and rebalance the nation’s growth toward domestic demand and away from exports. Data this week showed record overseas sales helped drive China’s trade surplus to a two-year high in July and consumer prices rose at the fastest pace in three years.

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