USD/CNY: Mild upward pressure - Westpac

According to Frances Cheung, Research Analyst at Westpac, recent comments from PBoC Yi Gang may exert a mild upward pressure on USD/CNY on two fronts.

Key Quotes

“First, Yi hinted on room for further easing. There is potentially further easing, mainly via RRR cuts but rates on various facilities are tools as well, in our view. While interest rate differentials may not be an important driver, the divergent monetary policies in China and US will nevertheless exert pressure on the yuan.”

“Second, Yi also said the RMB was at a “reasonable and equilibrium level” and its volatility is “normal”. This is in line with our view that the authorities are likely comfortable with some RMB weakness, provided that it is driven by market forces (as Yi mentioned the “backdrop of an appreciating dollar”), and that it does not invite unnecessary speculation leading to uncontrolled capital outflows.”

“Meanwhile, offshore CNH rates eased, adding to the perception that any FX operation is on the light side. The outcome of the US Treasury FX report may have reinforced the market perception that China is not aggressive in resisting yuan depreciation, but it does not affect PBoC stance.”

“The last thing the authorities want to see is uncontrolled capital outflows. As such, smoothing operations may still be deployed, potentially before USD/CNY reaches 7.00. Next resistance remains at 6.96.”