Free Trial

CNY FX: Fresh FX Policy Action Risks Rising?

MARKET INSIGHT

USD/CNH is at fresh cyclical highs, we currently sit around 7.1100. This comes despite today’s fixing outcome, which was again much stronger than market expectations and remained sub 7.0000.

  • Onshore USD/CNY spot has kept pace with USD/CNH gains this past week, leaving little spread between the two rates.
  • The spot rate onshore (last above 7.1000) is now +1.55% above the level of today's fixing. As the chart below suggests, we haven't too much time at such elevated levels relative to the fixing (as spot is allowed to trade -/+2% either side of the fixing rate).

Fig 1: Spot USD/CNY Deviation With Onshore USD/CNY Fixing Rate

Source: MNI - Market News/Bloomberg

  • Without a sharp turnaround in broader USD sentiment, it's difficult to close this gap without allowing the USD/CNY fix to set higher.
  • If we see this occur it may only fuel further depreciation expectations, as the market may interpret it is a sign the authorities are more comfortable with current CNY levels.
  • To be sure, the rate of change in onshore spot over the past month is below previous higher, see the second chart below. The likely concern though is we are closer to previous highs from a level’s standpoint. Onshore spot is around 1.15% away from 2019 highs.
  • Such a backdrop may push us closer towards fresh policy actions by the authorities to defend the FX (we outlined some options in this piece).
  • Still, it may be difficult to call a peak in USD/CNY give continued widening in the respective policy outlooks.

Fig 2: USD/CNY - Rolling 1 Month Change

Source: MNI - Market News/Bloomberg

To read the full story

Close

Why MNI

MNI is the leading provider

of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.

Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.