PBoC Tweaks FX Reserve Requirement Ratio After USD/CNY Fall

The weekend saw the PBoC note that it will lower the reserve requirement ratio for financial institutions when conducting some FX forwards transactions, effective from today (Monday 12 October). Under the previous framework financial institutions had to set aside 20% of the previous month's yuan forwards settlement amount as foreign exchange risk reserves, this will move to 0% as of today. In essence the move makes it "cheaper" to short the yuan after the recent rally vs. the USD. The PBoC noted that it will "continue to maintain flexibility in the exchange rate, stabilize market expectations, and keep the yuan basically stable at reasonable and balanced levels." Note that the PBoC reinstated the 20% reserve requirement ratio in August 2018 after removing it in September 2017.

• An ANZ analyst tweeted that "market will likely unwind long yuan positions on Monday as they interpret this as a signal that the authorities want to reign in currency strength. But this removal of the reserve requirement could be more to encourage firms to hedge FX risk and part of enhancing market structure. The fixing on Monday will be closely watched for any further clues." Meanwhile, Nordea aren't convinced that the move will be meaningful: "We doubt this is enough to turn the tide in USD/CNH due to the attractive carry to vol in USD/CNH shorts. PBoC rate cuts or higher U.S. rates are needed to really turn the tide."