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China: PBOC steps up FX market intervention - ING

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 12, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) - Tim Condon, Chief Economist at ING, suggests that the offshore forward points need to narrow (“move left”) for the Chinese intervention to be judged successful.

    Key Quotes

    “Intervention in the USDCNH, which on the face of the narrowing USDCNH premium to USDCNY began last Thursday, stepped up big time yesterday. The premium narrowed to 0.22% from 1.34% on Friday as CNH Hibor rates spiked to record highs. We believe a wide offshore USD premium is embarrassing for the PBOC because of the SDR implications: a wide offshore premium could disadvantage borrowers from the IMF that receive CNY through the SDR basket at the appreciated onshore CNY rate.

    However, the widening of offshore forward points since the intervention began also could signal that the PBOC is fighting a losing battle against economic fundamentals arguing for a much weaker CNY. Forward points typically follow the spot rate; when the spot rate appreciates the forward market reprices for less depreciation. In contrast, USDCNH forwards repriced for greater CNH depreciation in the recent USDCNH intervention.

    The offshore forward points need to narrow (“move left”) for the intervention to be judged successful.

    December trade data is due tomorrow at 10am local time. We forecast a $53 billion trade surplus (Bloomberg consensus: US$51.3bn), which would put the full-year surplus at US$596bn, up US$214bn from 2014. The massive positive swing in the trade surplus is counter to the view that the economic fundamentals argue for a much weaker CNY. The evolution of the surplus this year bears close watching.”
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