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FX Reserve Requirement Ratio Cut by 2ppts in Likely Response to USD/CNY Rally

PBOC
  • Wires report that the Chinese central bank are to cut the Foreign Exchange Reserve Requirement Ratio by 2 percentage points, with the move effective from September 15th.
  • This marks the first cut in the FX RRR since late April, when they trimmed the rate by 1ppt. The mechanics behind today's policy move mean they lessen the incentive for commercial banks to hold more in FX reserves, thereby implicitly dropping USD demand while boosting supply of dollars.
  • The move a likely response to the broad USD/CNY rally we've seen since mid-August.
  • The move from China not completely unexpected given recent FX volatility. While the China currency is still very elevated in NEER terms, the domestic focus is likely to rest with USD/CNY levels. In the lead up to the party congress, expected in late October/early November and where Xi Jinping is expected to be confirmed for a third term, the emphasis on stability across all aspects of financial markets, including FX, is likely to be fairly strong.
  • Follows the expansion of the pushback via the daily FX fixing mechanism and next steps could include changing reserve requirements on FX forward transactions.
  • Recall from last week: MNI MARKET ANALYSIS: Yuan Defence Steps Up - https://marketnews.com/mni-market-analysis-yuan-de...
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