CFETS Continues Move Higher

There has been plenty of focus on the regional and indeed broader outperformance of the CNY through '21, with the CFETS RMB index now sitting at the highest level witnessed in ~6 Years. We have covered the supportive factors re: the yuan (namely trade flows, CGB index inclusion, steadier Sino-U.S. relations & carry) on many occasions, so won't dive into them in detail here.

• The PBoC has warned against one-way bets in the market, while pointing towards the need for increased risk management on the part of financial institutions and businesses.
• Subsequently, RTRS sources noted that "a central bank-led self-regulatory group that helps to oversee China's foreign exchange industry has asked commercial banks to cap the size of their proprietary trading accounts," on Friday.
• We would suggest that the overall stability of the USD/CNY cross witnessed in recent weeks will please policymakers (best evidenced by the lack of sizeable deviation in the PBoC mid-point fix vs. wider sell-side estimates), while the steady appreciation in the CFETs basket is the driving factor behind the aforementioned rhetoric deployed by policymakers (although it does provide some cover vs. surging commodity prices).
• If the PBoC becomes more concerned with CNY appreciation pressure then the initial steps will likely come via tweaks to the cost of holding long derivative positions in the yuan (via reserve requirement ratios surrounding the various trading mechanisms), followed by more overt signals of discomfort via the USD/CNY mid-point fixing mechanism if the rhetoric/tweaks to costs of holding CNY long positions doesn't prove to be effective.

Fig. 1: CFETS RMB Index

Source: MNI - Market News/Bloomberg