USD/CNY: Twist the yuan fixing to deter speculative outflow - ING

The PBoC twisted the yuan daily fixing mechanism by requiring contributing banks to add counter-cyclical factor(s) to the fixing formula, notes Iris Pang, Research Analyst at ING to stop speculative flows from the Chinese currency.

Key Quotes

“Each bank has discretion on how to calibrate the factor(s), so it is a highly opaque process. The policy rationale for the change was to avoid excessive yuan depreciation against the USD when the Fed hikes further. The Immediate impact of the twist was a 0.55% appreciation on the first day of June.” 

“Another 10bp hike in the 7-day reverse repo rate in June is still possible, if Fed hikes result in an increase in speculative capital  outflows”

“If so (perhaps boosted by external direct investment), the PBoC could guide the yuan fixing towards further appreciation near-term.”