CNY: Fixing in line with expectations - Westpac

The CNY has been fixed more or less in line with expectations in recent sessions, according to Frances Cheung, Research Analyst at Westpac.

Key Quotes

“The 23.6% retracement (from 2014 low/2016 high) of 6.2720 remains a key support for USD/CNY. The PBoC injected liquidity into the market via MLF (medium-term lending facility) ahead of maturity and at a larger amount, running into the long holidays. Latest aggregate financing data show a mixture of high loan growth but softer credit through offbalance sheet items, suggesting de-leveraging policies have been working their way. The recent  liquidity and credit developments have provided the market with comfort, but the swing factor is the implementation schedule of the asset management rule.”

“The latest enhancement of settlement (on a net-basis) for onshore long positions in USD/CNY forwards is another step forward on FX reform, putting short and long positions under the same treatment. The move also suggests that the authorities feel more comfortable with the overall capital flow picture and are moving to a more neutral policy. Although there have been rising outflows via FX forwards by banks on behalf of clients over the past months – likely a result of the removal of the FX risk reserve requirement, forward transacted by banks on behalf of clients amount to only around 13% of the spot FX transaction, and spot FX transaction point to a stabilisation in outflows versus  inflows.”

“In the offshore CNH market,  net Southbound equity flows stay robust, upon a combination of Southbound flows and some liquidation of Northbound investment. These flows keep CNH forward points in check, but the tail risk is an abrupt liquidation of HK stock holdings that can potentially lead to a substantial tightening of CNH liquidity given cumulative net inflows amounting to more than RMB500bn.”