ANZ: CFETS Index May Constrain CNY, But Further Gains Seen

ANZ note that "in recent years, CNY has tended to strengthen from the beginning of the year, and leading into the Chinese New Year holidays. Exporter conversion of accumulated foreign exchange proceeds are behind this move, in our view. We see further gains in the yuan in the run-up to the Chinese New Year holidays in mid-February this year, given the large trade surplus and record high FX deposits being held. In addition, continued restrictions on international outbound travel will mean significantly reduced demand for USD this year, which will accentuate yuan strength, in our view. But the pace of appreciation will be capped by the level of the CFETS RMB Index. Today's (USD/CNY) fix was surprisingly weak by 100pips relative to our model prediction (actual: 6.4605 vs expected: 6.4505). It is very unusual to have such a weak bias in the fix, which is well above the normal error range. In our view, there is no doubt that today's fix is a signal to the market, but more in regards to the CFETS RMB Index rather than the level of the yuan exchange rate. We have long seen the 96 level in the CFETS RMB Index as a key resistance level. The fact that the index was kept unchanged from yesterday at 96.08 suggests the authorities set the fix to keep the index there, preventing it from moving higher. This does not mean that the yuan cannot continue to appreciate. It is just that the CFETS RMB Index will be a binding constraint on how much the yuan can move in the near term, and will be more dependent on further dollar weakness."