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26 Feb 2014
Flash: Weaker CNY will not persist - RBS
FXStreet (Bali) - According to Greg Gibbs, FX Strategist at RBS, the recent fall in CNY appears artificial lacking a clear objective, anticipating that the persistent appreciation in yuan will return.
Key Quotes
"In the period preceding this fall in yuan, that began one week ago, CNH was trading very strong below the band allowed for the USD/CNY. This was indicative of strong net inflows to yuan requiring intervention to prevent further appreciation."
"The recent fall in yuan has essentially moved the spot CNY and CNH rates to the centre of the band (i.e. the fixing rate); the fix itself has fallen but much more modestly."
"Most commentators are saying that this has been engineered by the PBoC/SAFE, suggesting that they have decided to use intervention to contribute to the fall in CNY, and thus appear to have been buying USD and selling yuan in significant quantities. The commentary supposes that this is intended to increase volatility and discourage international investors from speculating in persistent yuan appreciation and earning modest carry return."
"If so, in terms of FX reserves accumulation nothing much has changed. China appeared to be accumulating FX reserves while holding a floor under USD/CNY and they have continued to do so by essentially raising the floor (for now) to within the official +/- 1% band around the fix. This is a heavily managed currency that is still largely controlled by the PBoC. As such, to date, increased volatility or not, it appears it is mostly artificial in the sense that it appears engineered by China."
"This suggests that the weaker CNY and so-called volatility will not persist. At some point China will wish to stop accumulating reserves, which many advisors to the Chinese government have argued already are too large approaching $4tn. And when it does, the persistent appreciation in yuan will return."
Key Quotes
"In the period preceding this fall in yuan, that began one week ago, CNH was trading very strong below the band allowed for the USD/CNY. This was indicative of strong net inflows to yuan requiring intervention to prevent further appreciation."
"The recent fall in yuan has essentially moved the spot CNY and CNH rates to the centre of the band (i.e. the fixing rate); the fix itself has fallen but much more modestly."
"Most commentators are saying that this has been engineered by the PBoC/SAFE, suggesting that they have decided to use intervention to contribute to the fall in CNY, and thus appear to have been buying USD and selling yuan in significant quantities. The commentary supposes that this is intended to increase volatility and discourage international investors from speculating in persistent yuan appreciation and earning modest carry return."
"If so, in terms of FX reserves accumulation nothing much has changed. China appeared to be accumulating FX reserves while holding a floor under USD/CNY and they have continued to do so by essentially raising the floor (for now) to within the official +/- 1% band around the fix. This is a heavily managed currency that is still largely controlled by the PBoC. As such, to date, increased volatility or not, it appears it is mostly artificial in the sense that it appears engineered by China."
"This suggests that the weaker CNY and so-called volatility will not persist. At some point China will wish to stop accumulating reserves, which many advisors to the Chinese government have argued already are too large approaching $4tn. And when it does, the persistent appreciation in yuan will return."