China: Uncertain PBOC policy after 811 destroyed the consensus around the CNY - ING

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 28, 2015.

  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 811, the day the PBOC reformed its USDCNY fixing mechanism, may have been the most momentous day for financial markets since 22 May 2013, the day Bernanke triggered the taper tantrum.

    Key Quotes

    “Shocked investors saw the move as a panicked response to an economic crisis that had begun with the stock market crash. The spike in China hard landing fears and associated selloff in risky assets dominated financial markets in August and September.”

    “In the FX market the panic manifested itself in an upward shift in the onshore and offshore forward curves and the opening of a significant wedge between them. The PBOC policy of intervening in the onshore and offshore markets, macroprudential policy – a 20% risk reserve requirement on banks’ short positions with non-bank clients – and stabilizing the daily USDCNY fixings eventually calmed the market and by the middle of October the onshore and offshore forward curves had re-converged.”

    “811, however, destroyed the consensus view of the CNY as a one-way appreciation bet. In late November 2014 the median analyst consensus forecast was for a 2.3% CNY appreciation over the next year. Today they forecast a 3.6% depreciation.”

    “Unsettled expectations mean uncertainty, which we think explains why the reaction in the FX market to the surprise policy interest rate and RRR cuts on 23 October was similar to the reaction to 811,: it caused the onshore and offshore forward curves to diverge. However, unlike after 811 when the initial divergence was followed by a steady but slow re-convergence, the gap between the two curves has continued to widen.”
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