Yuan Tumbles After PBoC Tweaks FX Reserve Requirement Ratio

Spot USD/CNH has surged after the re-open in reaction to the PBoC's decision to lower the 20% risk reserve requirement ratio for financial institutions conducting some FX forwards transactions to 0%, which effectively makes it easier to short the yuan.

• The PBoC's decision came after the rapid post-holiday appreciation in the redback, which saw onshore yuan gain as much as 1.4% vs. the greenback, its fastest daily rally in 13 years. Not only CNY had to catch up with market moves from over the Golden Week holidays, but drew additional strength from a stronger than exp. PBoC fix.
• The weekend's tweak to the reserve requirement ratio rule cast some doubt over the PBoC's willingness to let the yuan continue its rally. Therefore, the first fixing of the central USD/CNY mid-point this week is set to attract much attention.
• Elsewhere, PBoC Gov Yi authored an op-ed published in China Finance over the weekend. The official said that China's central bank will maintain normal monetary policy and plans to encourage a reasonable increase in household savings and incomes, while keeping liquidity somewhat ample. In a separate piece, Yi's deputy Chen wrote that the central bank will seek to prevent excessive liquidity, which could promote inflation, debt expansion and asset bubbles.
• Spot USD/CNH last deals at CNH6.7273, almost 400 pips better off. A break above Oct 8 high/round figure of CNH6.7479.6.7500 would turn focus to Oct 2 high of CNH6.7781, followed by the 50-DMA/Sep24 high at CNH6.8437/62. Conversely, Friday's low of CNH6.6787, located within the CNH6.68-67 area which limited losses in 2019 (with that year's low at CNH6.6704), continues to draw bearish attention.
• On the data front, Chinese trade data is due Tuesday, with inflation figures coming up Thursday.