Caixin PMI The "Straw That Broke The Camel's Back"

Weaker than expected Caixin PMI from China, coupled with weaker official PMI, has seen CNH decline significantly after resisting the fix. USD/CNH spikes from a session low of 6.4432 to hit 6.4707.

• Caixin PMI drops to 51.5 from 53.0 previously and below estimates of 52.6. This is the lowest reading for the headline index in 7 months, while the output component hits the lowest level for 10 months at 52.5. New orders were also weak.
• The yuan had been strengthening relentlessly, despite a series of fixings that were higher (i.e. weaker for yuan) than expected. The net misses for the fix in January were 284 pips, illustrating the PBOC's asymmetric response function (i.e. preference for weaker yuan) in fixings. The December net misses were 133 pips.
• There are structural headwinds for further gains in the yuan, but yuan bulls have thus far mostly ignored these. China has taken steps that appear to be intended to curb the yuan rally, rather than the PBOC intervening directly. CFETS lowered the US dollar weighting in its currency basket from last month, trying to reduce its influence over the yuan exchange rates. That move was followed shortly by a partial relaxation of restrictions on capital flows for cross-border yuan use, which will facilitate outbound investment. The CFETS RMB index closed at 96.5 on Friday, the first close above 96.0 since 2018.