18 Aug 2015
RMB timelines, USD/CNY risks to the upside - DB
FXStreet (Guatemala) - Analysts at Deutsche Bank explained a time line in respect of the Chinese and the RMB weakness.
Key Quotes:
"In the near term, we suspect China will manage RMB weakness via more active intervention, in particular through guiding the spot-fix close, in order to calm market sentiment."
"However, this is unlikely to last. History suggests (2012 and 2014 band widening) that after a notable shift in FX regime, the PBoC will only manage market expectations for 2 to 8 days before allowing market forces greater play. Given the magnitude of the move this week, it is possible the period of calm may be longer than in previous regime changes, but we doubt it will be significantly longer (i.e. for the rest of the year) since it will defeat the purpose of a more market driven currency regime.
RMB to that extent will gradually evolve (as our colleague Alan Ruskin recently suggested) from a modest initial devaluation of 2-5% to eventually a bigger scale adjustment but only in response to market pressure with the authorities only smoothening the volatility. In other word, the market will gradually see an increase of two way flexibility in USD/CNY spot around the fix; and with the full utilization of the band, the PBoC could then further widen the band from +/-2% to +/-3%, moving a step closer to a more market driven FX regime. Assuming this happens in the next 6-12months, in the absence of a notable rebound in China’s growth and the likelihood of the Fed’s normalization of monetary policy, the risk on USD/CNY spot is skewed to the upside, especially since the authorities will be wary of having CNY appreciate notably against its real effective trade weighted basket again."
Key Quotes:
"In the near term, we suspect China will manage RMB weakness via more active intervention, in particular through guiding the spot-fix close, in order to calm market sentiment."
"However, this is unlikely to last. History suggests (2012 and 2014 band widening) that after a notable shift in FX regime, the PBoC will only manage market expectations for 2 to 8 days before allowing market forces greater play. Given the magnitude of the move this week, it is possible the period of calm may be longer than in previous regime changes, but we doubt it will be significantly longer (i.e. for the rest of the year) since it will defeat the purpose of a more market driven currency regime.
RMB to that extent will gradually evolve (as our colleague Alan Ruskin recently suggested) from a modest initial devaluation of 2-5% to eventually a bigger scale adjustment but only in response to market pressure with the authorities only smoothening the volatility. In other word, the market will gradually see an increase of two way flexibility in USD/CNY spot around the fix; and with the full utilization of the band, the PBoC could then further widen the band from +/-2% to +/-3%, moving a step closer to a more market driven FX regime. Assuming this happens in the next 6-12months, in the absence of a notable rebound in China’s growth and the likelihood of the Fed’s normalization of monetary policy, the risk on USD/CNY spot is skewed to the upside, especially since the authorities will be wary of having CNY appreciate notably against its real effective trade weighted basket again."