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MS Expect Further Pushback From PBoC

CHINA
  • Morgan Stanley write that they expect further policy pushbacks from the PBoC and that the CNY could reach the central bank's tolerance level.
  • They write that the PBoC are concerned about CNY appreciation because it has appreciated too quickly in their view, because the CNY CFETS basket is at 98.0, the peak since the 2015 currency reform and that the USD could appreciate once the Fed starts tapering while China's BoP is more likely to deteriorate rather than improve over the medium term.
  • As a result, it is not in the PBOC's interest to let CNY overshoot and subject it to higher market volatility once the fundamentals start to turn.
  • The PBoC could further intervene via verbal intervention, more administrative tools (i.e. the FX reserve requirement ratio and other parameters for overseas lending), tweaks to encourage more capital outflows, direct FX intervention and the Counter Cyclical Factor.
  • MS stay long of a CNH/TWD carry trade, but are ready to close the trade should pushbacks become more aggressive.
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