CNY: Keep an eye on the CCF - Nomura

Analysts at Nomura suggest that the risk of US-led trade protectionism intensifying further remains high and believe that China will react to the approval of the next round of tariffs from the Trump administration by imposing a 5-25% tariff on USD60bn of US imports.

Key Quotes

“China has been relatively resistant against RMB depreciation thus far, implementing the 20% reserve requirement on onshore FX forwards (6 August).”

“In our view, the most significant factor has been the CCF. Although the gap between the traditional USD/CNY fixing model (onshore spot close and basket moves) and the actual USD/CNY fixing rates has been small at -78pips average per day since mid-August (24 sessions), it has been relatively consistent.”

“Since 15 August 2018, the errors (gap between the actual fixing and the traditional model) have totalled 1870 pips. We believe this has been the major factor for the limited move up in USD/RMB and without the CCF, USD/CNH would likely have already traded above 7.0.”

“Given the local macro challenges and policy expansion (still a lot of monetary measures), combined with developed market monetary policy normalisation (led by the US Fed), there are reasons beyond US-led trade protectionism to expect USD/CNH to trade higher in the near term.”

“A significant near-term focus of ours is on the USD/CNY fixing, where, if we observe a shift back to the traditional fixing regime (no CCF), especially when USD is bid, we would view this as a signal that authorities are moving back to a more flexible FX regime.”

“This may not be imminent but, if the CCF is removed in the near term, it would result in USD/CNH being quickly bid towards 6.94/95. A continued absence of the CCF could result in USD/CNH breaching 7.0.”