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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.
EXECUTIVE SUMMARY
- The China authorities are pushing back aggressively against yuan depreciation pressures, via the USD/CNY fixing mechanism.
- 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.
- Runaway depreciation pressures create the risk of shifting onshore expectations as well, particularly around breaking key levels such as 7.00.
- Outside of the fixing mechanism, China officials could also deploy other tools that have been utilized in the past, to curb depreciation pressures. These include changing reserve requirements on FX forward transactions. It could lower the reserve requirement for banks’ FX reserve holdings as well.
- Still, until we get relative policy cycles moving back in the yuan’s favor (i.e. US-China yield differentials trending back down), it may be difficult to call a peak in USD/CNY. At this stage, such a shift may be more driven by the Fed changing course rather than China, unless we see a move away from the country's dynamic-Covid zero strategy.
- Click to view full pdf: USDCNY Threatening 7 (Aug 30 2022).pdf
Fig. 1: USD/CNH & US-China 2yr Government Bond Yield Differential
Source: MNI - Market News/Bloomberg
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.
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