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13 Jun 2014
Sharp CNY appreciation limited near term - BAML
FXStreet (Bali) - The FX Team at BAML reviews the Chinese Yuan, noting that scope for sharp CNY appreciation is limited near term.
Key Quotes
"The PBoC lowered its USD/CNY fixing by 257 pips over 6-10 June before raising it again by 55 pips on 11 June. This is basically the first major downside surprise to USD/CNY since the band widening in March. Our view is that better economic data and international diplomacy are at play here."
"The lower USD/CNY fixings are consistent with some stabilization in macro data such as the March trade balance, which came in at US$35.9bn versus an expectation of US$22.6bn. The May HSBC and official PMI data were also better than expected, while PPI and CPI also bounced higher, allaying concerns over deflation risks."
"Additionally, recent policy actions show China's leadership stepping in to support growth. The PBOC is injecting liquidity via targeted RRR cuts and re-lending, diminishing to inject liquidity through unsterilized USD/CNY buying intervention as was the case some months ago."
"On the bilateral front, the US state department has confirmed that that the US-China Strategic and Economic Dialogue (SED) will be held in Beijing in early July. This is also likely weighing on the setting of the CNY fixing in order to deflect the criticism of China being a currency manipulator."
"We believe scope for sharp CNY appreciation is limited near term. Moreover, China's policy makers continue to emphasize the need for two-way CNY movement. That said, we believe sustained CNY depreciation is unlikely to be PBOC's preferred way to stimulate the economy given its current objective of economic rebalancing from exports to domestic demand."
Key Quotes
"The PBoC lowered its USD/CNY fixing by 257 pips over 6-10 June before raising it again by 55 pips on 11 June. This is basically the first major downside surprise to USD/CNY since the band widening in March. Our view is that better economic data and international diplomacy are at play here."
"The lower USD/CNY fixings are consistent with some stabilization in macro data such as the March trade balance, which came in at US$35.9bn versus an expectation of US$22.6bn. The May HSBC and official PMI data were also better than expected, while PPI and CPI also bounced higher, allaying concerns over deflation risks."
"Additionally, recent policy actions show China's leadership stepping in to support growth. The PBOC is injecting liquidity via targeted RRR cuts and re-lending, diminishing to inject liquidity through unsterilized USD/CNY buying intervention as was the case some months ago."
"On the bilateral front, the US state department has confirmed that that the US-China Strategic and Economic Dialogue (SED) will be held in Beijing in early July. This is also likely weighing on the setting of the CNY fixing in order to deflect the criticism of China being a currency manipulator."
"We believe scope for sharp CNY appreciation is limited near term. Moreover, China's policy makers continue to emphasize the need for two-way CNY movement. That said, we believe sustained CNY depreciation is unlikely to be PBOC's preferred way to stimulate the economy given its current objective of economic rebalancing from exports to domestic demand."