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MNI: PBOC Has Tools to Slow Yuan Slide - Analysts

MNI (PERTH)
(MNI) London

The People’s Bank of China may need to deploy more of its tools to curb any sharp falls in the yuan, said analysts and economists as the currency threatens to break through 7 against the U.S. dollar.

While yuan weakness has primarily been driven by a turbocharged rally in the U.S. dollar, the PBOC will focus on keeping the CNY stable against other leading currencies like the euro and Japanese yen, while allowing the yuan to weaken against the greenback at an “appropriate” pace, said Huang Wentao, analyst at China Securities.

However, Huang said the PBOC will be challenged by the need to ensure ample liquidity conditions and stabilize the yuan at the same time.

The PBOC’s discomfort with the pace of the yuan’s slide against the U.S. dollar was underscored by Monday’s surprise move to cut the FX reserve requirement ratio to 6% from 8%, a move viewed as an attempt to slow the yuan’s fall rather reverse the momentum that could see it breach USDCNY7 if the US dollar rally continues. The FX RRR cut, which followed a 100bps cut in April, released an estimated USD19 billion of FX liquidity. (See: MNI BRIEF: PBOC Cuts FX RRR To Shore Up the Yuan)

Analysts said the yuan is likely break the 7 level against dollar as early as this month should the U.S. Dollar Index rally to 110-120.

PLENTY OF TOOLS

The PBOC’s arsenal of tools to slow the yuan’s fall include hikes in the FX risk reserve ratio, which would require financial institutions to set aside more cash when conducting FX forwards trading, and tightening controls on cross-border capital outflows, Huang said. It could also drain yuan liquidity in the offshore market or officially reintroduce the counter-cyclical factor into CNY daily fixing formula. (See MNI: Signs of PBOC Counter-Cyclical Factor In CNY Fix - Analysts).

Analysts said the central bank has already added the counter-cyclical factor to its yuan-fixing model since mid-August. According to MNI's calculation, the daily CNY fixing was stronger than expected for 15 days since August 15. The fixing printed at 6.9160 on Wednesday, the weakest in two years, and is a -454 pip surprise in USD/CNY terms. This is the largest downside surprise since Bloomberg started compiling consensus estimates in 2018.

Tianfeng Securities analyst Sun Binbin said the FX RRR reduction would unlikely reverse the yuan’s weak momentum, adding the yuan continued to drop after April’s FX RRR cut. He said that implied the central bank may be focused on slowing the falling yuan.

Sun predicted the PBOC may want to guide the yuan to a range of 6.9-7.0 against the greenback before the 20th Party Congress, but that is contingent on the U.S. dollar rally losing steam.

If the US dollar Index remains high, particularly if the USDJPY remains above the key 140 level, the chance of the yuan breaking through CNY7 is rising, Sun said.

Analysts at Huatai Securities estimated the yuan would drop to a 7.1 to 7.2 should the US Dollar Index rise to around 115.

MORE EASING

Golden Credit Rating International Co. analyst Wang Qing estimated the yuan would endure moderate weakening pressure against the U.S. dollar, while the yuan exchange rate against the currency basket would remain strong.

Wang said the weak yuan would not be a substantial restraint on easing monetary policy given economic growth is recovering and the trade surplus is wide enough to cushion a large depreciation.

Sun said it is necessary for the PBOC to prioritise the domestic economy, employment and credit expansion as the economic recovery is tepid, adding that Covid continues to disrupt activity. He cited PBOC vice-governor Liu Guoqiang comments from a Monday press conference that China’s monetary policy options “have room in both quantitative and price tools”.

Robert covers RBA and RBNZ policy and the economy for MNI in Australia.
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Robert covers RBA and RBNZ policy and the economy for MNI in Australia.
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