In the past, when the PBoC increased flexibility of the Chinese currency, the market reacted by selling USDCNY NDFs in anticipation for greater renminbi appreciation. This time around, however, the market has not reacted with the same enthusiasm for long CNY trades, as the China appreciation story has lost much of its allure, at least in the medium term.
All three renminbi curves – onshore deliverable CNY, offshore deliverable CNH and offshore NDF – have already priced in some degree of renminbi depreciation in coming months and the PBoC’s latest move could add further upward pressure to the NDF curve in the near term, say strategists at ANZ bank.
| USDCNY - Onshore, CNH and NDF curves |
 |
| Source: ANZ |
As most commentators have noted, an obvious consequence of a widening of the renminbi trading band is increasing volatility, particularly in the short end of renminbi markets. In the current climate, this, along with recent weaker-than-expected GDP data and renewed concerns in Europe, adds a further negative ingredient to dampen market appetite for long CNY positions, says Irene Cheung, senior FX strategist at ANZ.
With a more market-determined spot rate, there is also less room for CNY undervaluation and hence less room for CNY appreciation expectation to be priced in the outright NDF curve, all things being equal, says Cheung.
As such, ANZ expects the outright NDF curve to steepen over time, narrowing the gap between the NDF and CNH curves, currently trading around 450 pips wide.
To reflect this view, the bank recommends selling one-year USDCNH forwards and buying one-year USDCNY NDFs, on the expectation that the gap will narrow to between 200 and 300 pips.
Paul Mackel, head of currency research at HSBC in Asia, says that increased flexibility and volatility for onshore USDCNY should also translate into a similar increase in volatility in CNH markets.
He notes that the greatest periods of CNY-CNH divergence has been when the trading-band ceiling restricted onshore USDCNY from following USDCNH upwards.
A wider trading band gives USDCNY greater flexibility to move upwards during periods of risk off and USD demand, meaning CNY-CNH divergence during such periods is likely to be more limited than previously.
“Greater convergence between CNY and CNH spot markets should make spread plays and carry opportunities in the longer end of the CNH curve more attractive,” says Mackel.