USD/CNH may be trading in a gradually rising range – Westpac

Frances Cheung, an analyst at Westpac, notes that the PBoC is sending signals that it would like to mitigate RMB depreciation pressure by fixing USD/CNY somewhat low, and by announcing that it would issue offshore PBoC bills again.

• “The PBoC does not mind letting the yuan weaken, but would still want to smooth market movement. Tuesday’s USD/CNY fixing was 6.9683, up from 6.9225 on Monday but importantly, below 7.00 (and the spot close of 7.0507). We do not view this as a response to the US naming China an FX manipulator, on the notion that China may see much-reduced need to keep USD/RMB below a certain cap as a nice gesture ahead of/amid trade talks. Indeed the chances of another round of trade talks near-term look slim, and China appears to be preparing itself for a no-trade-deal scenario.
• We expect China to shift its focus further onto supporting domestic growth, via a combination of policies – FX adjustment alone is not enough to counteract the impact from tariffs. The PBoC maintains its stance that the RMB will stay stable around appropriate equilibrium levels (in Chinese, literally, it can be interpreted as “an appropriate equilibrium level” or “appropriate equilibrium levels” and we chose the latter).
• Our view has been that these equilibrium levels are not static. Looking ahead, USD/CNH may be trading in a gradually rising range. While the PBoC had previously made it clear that there was no “red line” - no hard FX level to defend, and more controls on capital flows are probably in place than before 2015, the breaking of a psychological level can still potentially trigger undesirable capital outflows. This may explain why the PBoC wants to mitigate “herd behaviour” around the RMB.
• Near-term, USD/CNH has faced resistance around 7.10 intra-day, and this pair is likely to hover around this level. Selected Asian currencies may get a temporary respite from the lower-than-expected USD/CNY fixing on Tuesday. However, upward pressure on Dollar/Asia shall return.
• First, the signal that the Chinese authorities are not defending a hard FX level has been sent. Second, the impact from trade tariffs is persistent, affecting regional trade flows. Third, there are tensions elsewhere in the region including trade tensions between Korea and Japan, and geopolitics.”