The move in USDCNY has caused intrigue in a market that had been pricing in renminbi depreciation after recent disappointing Chinese economic data. However, for two straight days USDCNY hit the limit of its 1% trading band – on Friday notching up a high of Rmb6.2660, its strongest level since 1993. Opinion appears divided over the source and significance of the move. Benoit Anne, head of EM FX strategy at Société Générale, is bearish on the renminbi and says his bias is to disregard the spike higher in the renminbi, saying it merely reflects the fact there is more volatility in USDCNY than there used to be. “The big picture from my standpoint is that this move is certainly not going to be pursued, and on the contrary might correct back,” he says. “Despite the recent sharp downside move of the USDCNY, we maintain the view there will be no CNY appreciation in 2012.” Others believe there is more to it than that. Crédit Agricole strategist Dariusz Kowalczyk says at first glance it seems market forces have been behind the appreciation in the renminbi since late July. That is because, while fixings in USDCNY set by the People’s Bank of China (PBoC) have been relatively stable in the Rmb6.33 to Rmb6.35 range, appreciation has been caused by a shift in the spot rate within the daily trading band.
Kowalczyk says there is not enough evidence, however, to prove that market forces drove the shift within the band.
Indeed, Crédit Agricole’s latest available data show that mainland Chinese clients were net sellers of renminbi in August, creating net supply that should exert downward pressure on the currency.
That means that since then for market forces to be responsible for the move in USDCNY, either clients started to buy the renminbi aggressively or that banks in mainland China have taken long positions in the currency to take advantage of high interest rates.
Kowalczyk says neither of those two scenarios is likely, meaning that something else was behind the move in spot.
That, he believes, could be action from the PBoC in an effort to boost the re-election chances of US president Barack Obama, who is likely to take a softer stance on Sino-US trade relations than his opponent Mitt Romney.
“The PBoC may have engineered the spot move under US pressure ahead of the approaching elections,” says Kowalczyk.
He therefore believes that once the US election is out of the way in November, the renminbi will be vulnerable to a correction.
Others point to a simpler explanation: that the renminbi has been driven higher by inflows into Chinese equities, which have been driven higher by hopes of a fresh economic stimulus package from the authorities in Beijing at the Communist Party conference next month.
Steve Saywell, global head of FX strategy at BNP Paribas, takes that view, noting the more positive tone towards China reflects the fact the three main fears that have dogged investors in recent years – a double-dip recession in the US, a break-up of the eurozone and a hard landing in China – are evaporating.
Indeed, QE3 from the Federal Reserve has gone some way to erase concerns about the US economy, while the actions from Mario Draghi, president of the European Central Bank, have eased fears over a break-up of the single currency. That leaves the issue of China.
“If you take the view there will be a stimulus package in China, the fact that the US and the eurozone are sorting themselves out is positive for global markets,” says Saywell.
“In a positive world, you have to assume that Chinese stocks do very well, and the renminbi goes higher as well, particularly as the dollar weakens from QE3.”
If that is the case, a lot of those bearish renminbi forecasts will have to be revised.
CNY spot versus fixing
|Source: Bloomberg, CA CIB|