China: CNY fix jumps on USD’s Yellen rally - ING

Tim Condon, Chief Economist at ING, suggests that the PBOC policy has greatly reduced devaluation fears and restored risk-on while the authoritative person interview raised hard-landing fears and restored risk-off.

Key Quotes

“The USD’s Yellen rally, predictably, led yesterday to the largest CNY fixing depreciation since May 19, which, predictably, was preceded by a big DXY appreciation (the April FOMC minutes were released on May 18). We use “predictably” guardedly. We’re not sure that The Wall Street Journal article claiming that in early January the PBOC “ditched the market-based mechanism” for fixing USDCNY in favour of stabilizing the fixing rate is the whole story – the PBOC condemned it on Weibo – but since the second week of January the USDCNY fixing rate has been much more closely correlated with DXY. A close correlation is a feature of basket pegs, for example Singapore’s.

Based on PBOC guidance analysts have developed models of the USDCNY fixing policy. The more predictable fixing policy has reduced but not eliminated devaluation fears. We think such fears were responsible for the 7% decline in the Shanghai in early May, though unlike in November-December the stock market has stabilized. The CNY-CNH basis, the other measure of devaluation fears, also widened in the first two weeks of May and has since come in.

We considered China devaluation fears the proximate threat to risk-on investor sentiment and believed the PBOC’s more predictable USDCNY fixing policy had taken them off the table and risk-on prevailed. The People’s Daily authoritative person interview put hard landing fears back on the table and we now think risk-off prevails.”