RMB: Fixing for flexibility? - HSBC

The analysis team at HSBC points out that RMB has staged a strong rally lately, which has allowed some catch-up to the strength seen by other currencies against the USD as the PBoC’s fixing has surprised on the downside lately and a new fixing mechanism may be aimed at alleviating such a gap.

Key Quotes

“According to Bloomberg, the PBoC has guided banks to add a ‘counter-cyclical adjustment factor’ to the existing fixing mechanism. It is unclear what this factor specifically is and it will take some time to digest how the reported new mechanism compares to the previous regime. This is the second time this year that the PBoC appears to have adjusted its CNY fixing mechanism and is consistent with the authorities’ comments that exchange rate reform will continue.”

“In our view, the rally by the RMB and the likely adjustment in the fixing mechanism may also reflect the policy intention to have the RMB trade with greater two-way volatility, which is easier to introduce during a soft USD environment. Other steps to make the exchange rate move in a wider range are possible, as China prepares for the opening up of its markets to more foreign investors and increasingly allows more domestic capital to move abroad. With China’s capital outflows having slowed, and the RMB’s overvaluation reduced, the authorities can feel more confident that excessive RMB depreciation expectations have reduced.”

“This reported policy change is happening when the RMB has lagged the recovery of some regional currencies and the RMB’s yield advantage is rising. As such, the RMB should outperform in the near term and we are currently holding long CNY-KRW 1m NDF position. We still expect the RMB to weaken modestly versus the USD by yearend, but the two-way volatility nature of this exchange rate is increasingly set to rise.”