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CNH: Hiking FX Forward Reserve Requirements May Not Prevent Fresh Lows

MARKET INSIGHT

Neither USD/CNH, nor onshore USD/CNY spot, has seen much follow through post the PBoC's announcement that it will raise the risk requirement on banks' forward FX sales to 20% (from 0%). The move is designed to make it more expensive to short the yuan in the forward space.

  • USD/CNH dipped sharply towards 7.1300, but we now sit back close to 7.1600, just below earlier highs close to 7.1650. Onshore spot has pushed higher as well (near 7.1600). We are close to the top end of today's trading band (-/+ 2% above the USD/CNY fix), which comes in at 7.1704.
  • Today's move arguably hasn't surprised the market too much given the recent pace of depreciation pressures and getting close to previous highs (close to 7.2000). We also noted on Friday, risks of fresh FX policy action were rising, (see this link for more details).
  • Changing reserve requirement on forward transactions was first introduced in September 2015, post the devaluation. It was removed in 2017, before being reinstated in 2018 (during the US-China trade conflict), then removed in 2020.
  • In both 2015 and 2018, hiking of the forward FX reserve rate didn't prevent fresh cyclical lows in the currency over multi-week horizons post the announcement.
  • These previous episodes were also more China centric in the sense the 2015 period was focused on deleveraging offshore liabilities, while in 2018, it was the trade conflict.
  • This time around CNH is more a victim of broad based USD strength, although policy differentials (as signified by the very negative level of CNH forward points) and a much weaker growth back drop aren’t helping either. Hence today's announcement may not be enough to prevent fresh cyclical highs in USD/CNH.
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Neither USD/CNH, nor onshore USD/CNY spot, has seen much follow through post the PBoC's announcement that it will raise the risk requirement on banks' forward FX sales to 20% (from 0%). The move is designed to make it more expensive to short the yuan in the forward space.

  • USD/CNH dipped sharply towards 7.1300, but we now sit back close to 7.1600, just below earlier highs close to 7.1650. Onshore spot has pushed higher as well (near 7.1600). We are close to the top end of today's trading band (-/+ 2% above the USD/CNY fix), which comes in at 7.1704.
  • Today's move arguably hasn't surprised the market too much given the recent pace of depreciation pressures and getting close to previous highs (close to 7.2000). We also noted on Friday, risks of fresh FX policy action were rising, (see this link for more details).
  • Changing reserve requirement on forward transactions was first introduced in September 2015, post the devaluation. It was removed in 2017, before being reinstated in 2018 (during the US-China trade conflict), then removed in 2020.
  • In both 2015 and 2018, hiking of the forward FX reserve rate didn't prevent fresh cyclical lows in the currency over multi-week horizons post the announcement.
  • These previous episodes were also more China centric in the sense the 2015 period was focused on deleveraging offshore liabilities, while in 2018, it was the trade conflict.
  • This time around CNH is more a victim of broad based USD strength, although policy differentials (as signified by the very negative level of CNH forward points) and a much weaker growth back drop aren’t helping either. Hence today's announcement may not be enough to prevent fresh cyclical highs in USD/CNH.