“One of the strongest indicators of the shift in renminbi pattern has been the fact it is now highly correlated along with most other Asian currencies to the movements in the US dollar,” says Mitul Kotecha, head of global FX strategy at Crédit Agricole. “This is a sharp contrast to the renminbi relationship to the US dollar over the past 12 months.” According to the bank, the renminbi’s performance has been roughly in the middle of the range compared with other Asian currencies since the beginning of the year, having weakened by around 1%.
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“Renminbi movements have therefore become more closely aligned with Asian currency gyrations, albeit in large part due to official policy,” says Kotecha. “It avoided the sharp strengthening exhibited in some currencies but also has avoided the subsequent sharp drop.”
Despite close correlations with other Asian currencies in recent months, the renminbi has managed to maintain a lower level of volatility in the past few weeks when compared with its peers as global market uncertainty mounts, notes the bank.
The Indonesian rupiah and Indian rupee have had the highest historical volatility among Asian currencies.
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In addition, while many currencies have become highly sensitive to equity market performance – the Korean won, Taiwanese dollar and Indian rupee in particular – the renminbi is not.
“The renminbi has not been sensitive to local equity market movements and has also escaped from the selling pressure associated with equity market outflows from the region,” says Kotecha.
On the other hand, Crédit Agricole highlights that a widening in Chinese versus US bond yields have played negatively for the renminbi vis-à-vis the dollar. In contrast, as Indian, Thai and Indonesian yields widen against the US treasuries, their currencies strengthen.
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In terms of sensitivity to risk aversion, the onshore and offshore renminbi are not as attractive as safe havens as they were due to the fact they are acting more like other Asian currencies, although in relative terms they are still safer than other Asian FX. The difference, however, is the stronger influence of official policy on the renminbi.
Crédit Agricole expects the Chinese currency to appreciate by 2.7% to 6.20 by the end of the year and by 5.0% to 6.05 by end-2013.