Overnight reports that the authorities are reintroducing the countercyclical factor (CCF) to the USD/CNY fixing hasn't produced a large reaction in USD/CNH. Dips back to 7.1400/50 were still supported, while we touched a fresh high above 7.1900, before settling back down closer to 7.1800 into the close, which is where we currently track. Previous highs just under 7.2000 are still nearby. Broad based USD gains didn't help, with the DXY back above 114.00.
- Bringing back the CCF is unlikely to surprise the market a great deal. Indeed, some fixing estimates have likely already been altered to reflect such a risk.
- The CCF, which was first introduced in May 2017, is designed to counter the depreciation from daily spot moves that can feed into the fixing outcome. Essentially, spot USD/CNY pushes higher, this drives the fixing outcome higher, which in turn pushes spot higher once again.
- This move, along with Monday's announcement on the hike in reserves for forward FX transactions, again appears aimed at curbing the rate of yuan declines.