Yuan Shrugs Off Weaker Fix

PBOC fixed USD/CNY at 6.4608, slightly weaker for the yuan than yesterday after strengthening for a total of 645 pips in 2021 so far. USD/CNH has fallen nonetheless, last down 111 pips at 6.4386 helped lower by a weaker US dollar.

• Reports earlier in the day that the NYSE had completed another about turn and will delist China telecom companies led USD/CNH higher inspiring demand for the greenback and contributing to a higher fix.
• There are structural headwinds for further gains in the yuan, USD/CNH forward points have declined to the lowest level since July and impacted the implied yield of holding the currency.
• China has also taken steps that appear to be intended to curb the yuan rally, rather than the PBOC intervening directly. CFETS lowered the US dollar weighting in its currency basket from last week, trying to reduce its influence over the yuan exchange rates. That move was followed shortly by a partial relaxation of restrictions on capital flows for cross-border yuan use, which will facilitate outbound investment.
• Options in the space are also indicating yuan strength could stall.6.30-6.35 USD puts have been heavily favoured in 2021 so far.
• The central bank continued its post New Year drain, withdrawing CNY 110bn from the financial system, which equates to a net drain of CNY 510bn this week.