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21 Jan 2016
USD/CNY hits a glass ceiling - Westpac
FXStreet (Delhi) – Sean Callow, Research Analyst at Westpac, notes that the midpoint of the daily USD/CNY trading band has been very stable since the drama of 7 Jan when it printed a fresh high since 2011 and contributed to the rapid 7% slide in Chinese equities, prompting the daily limits to be dumped.
Key Quotes
“This stability on the daily fi xing has helped calm markets, with equities choppy but broadly range-bound and the yuan steadying, both onshore and off shore (CNH is the strongest Asian currency since 7 January, +1.3%). USD/CNY daily trading volumes on CFETS have dropped accordingly, from $38.6bn on 7 Jan to $18.8bn on 20 Jan.
But we can’t help feeling some déjà vu. The lowest spot USD/CNY has traded since 7 Jan is 6.5668. Given the 6.5578-5.5637 range for the fi xing rate, not a single trade has occurred at the benchmark rate. As the chart shows, this was also the situation in the months preceding the August 2015 “devaluation”/realignment (and indeed as far back as Dec 2014). So each day in both periods, the midpoint of the trading band has been set on the strong CNY/weak USD side of where the pair has traded for its entire session.
When the recent return to the pre-Aug 2015 USD/CNY fi xing approach will end is anyone’s guess. The record -$107.9bn m/m fall in PBoC FX reserves in Dec (-$513bn over the year) is not a sustainable situation, arguing for a less active hand in FX markets. Clearly the underlying dynamic is for capital outfl ows to exceed China’s trade surpluses, chipping away at CNY.”
Key Quotes
“This stability on the daily fi xing has helped calm markets, with equities choppy but broadly range-bound and the yuan steadying, both onshore and off shore (CNH is the strongest Asian currency since 7 January, +1.3%). USD/CNY daily trading volumes on CFETS have dropped accordingly, from $38.6bn on 7 Jan to $18.8bn on 20 Jan.
But we can’t help feeling some déjà vu. The lowest spot USD/CNY has traded since 7 Jan is 6.5668. Given the 6.5578-5.5637 range for the fi xing rate, not a single trade has occurred at the benchmark rate. As the chart shows, this was also the situation in the months preceding the August 2015 “devaluation”/realignment (and indeed as far back as Dec 2014). So each day in both periods, the midpoint of the trading band has been set on the strong CNY/weak USD side of where the pair has traded for its entire session.
When the recent return to the pre-Aug 2015 USD/CNY fi xing approach will end is anyone’s guess. The record -$107.9bn m/m fall in PBoC FX reserves in Dec (-$513bn over the year) is not a sustainable situation, arguing for a less active hand in FX markets. Clearly the underlying dynamic is for capital outfl ows to exceed China’s trade surpluses, chipping away at CNY.”