MNI Analysis: CFETS RMB Index May Rebound To 95 On PBOC Moves

--CFETS Index May Play Main Role in Yuan Daily Fixing Formula

--USDCNY May Fall To 6.60-6.70 If CFETS Rises To 95

     BEIJING (MNI) - The yuan is set to rally for the rest of this year, as the

central bank pushes the exchange rate back towards its preferred level against a

currency basket, researchers and official advisors have told MNI.

     The China Foreign Exchange Trade System RMB index, measuring the yuan

against a trade-weighted basket of 24 currencies, touched an historic low of

92.41 in the week of July 31, and weakened 5.22% to 92.77 from May 18 until

August 24, when the People's Bank of China moved to stem the decline, saying it

had restored the so-called "counter-cyclical factor" to its daily fixing.

     When the PBOC last suspended use of the counter-cyclical factor, in

January, 2018, the CFETS Index had been at about 95 -- believed to be a "comfort

level" for the central bank, which it may now target again.

     "The reintroduction of the counter-cyclical factor into the yuan's fixing

formula was maybe partly due to the sharp decline of the CFETS index," Zhang

Ming, senior fellow at the Institute of World Economics and Politics under the

Chinese Academy of Social Sciences, said in his latest note, indicating the

authorities do not want an abrupt depreciation of the yuan, particularly at a

time when the U.S government accuses China of manipulating its currency.

     --CFETS INDEX

     The PBOC has reiterated that the yuan exchange rate is determined by a

managed float, with reference to the currency basket, which acts as a buffer

against the impact on China's trade of fluctuations against the U.S dollar and

helps to keep the nominal effective exchange rate stable.

     But both the yuan-dollar exchange rate, USDCNY, and CEFTS have weakened

sharply in the past three months, the first time this has occurred since the

CEFTS index was created at the end of 2015.

     "The fixing price will be mainly decided by the CEFTS index after the

counter-cyclical factor filters the market moves," Xiao Lisheng, deputy director

of International Finance Research Institute of World Economics and Politics at

CASS, noted, "The yuan will remain volatile against the dollar, but keep to a

narrow band against the currency basket."

     "The CFETS index has basically reached the bottom and should rise," he

said.

     --BEATING BACK THE SHORTS

     A broadly stable, but rallying CEFTS index is also necessary to reverse

growing market moves to short-sell the yuan.

     "USDCNY may need to fall to a range of 6.60 to 6.70 in order to boost CFETS

to 95, which is the 'appropriate level'," said Han Huishi, a senior researcher

with China Construction Bank, one of the big four state-owned lenders, "But how

long it takes will depends on the determination of the authorities and market

confidence in the yuan."

--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com

--MNI London Bureau; +44208-865-3829; email: Jason.Webb@marketnews.com

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