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China: Yuan continues to tumble – BBH

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 6, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) – Research Team at BBH, notes that there is a consistency in the weakness in the Chinese yuan as the PBOC fixed the yuan lower for the seventh consecutive session.

    Key Quotes

    “The yuan is off about 0.67% today. This doubles the decline of the first two sessions of the week and leaves the yuan off one percent this week. While the pace of decline is commanding attention, the yuan has fallen less against the dollar this week than the closely managed Singapore dollar, Korean won, Taiwanese dollar, Malaysian ringgit, and the Indonesian rupiah, for example. Among the majors, it has fallen less than the euro, dollar-bloc currencies, and the Scandies. Looking further back, we note that CNY has only weakened 5% vs. USD over the past twelve months, making it one of the best performers in EM in that period.

    This is not to dismiss the decline in the onshore yuan. It is simply to recognize that the yuan's decline against the dollar that is spurring the spillage of so much ink is not so spectacular. It is a clear, even if managed, consequence of decoupling China's monetary policy from the US. The exchange rate is an important channel.

    The problem lies with the uncertainty over the intentions of Chinese policy makers. The market anticipates more depreciation (stronger dollar). The offshore yuan (CNH) is off a little more than 1% on the day and 2.2% for the year. The gap between the two stands at a new record high. The PBOC has tried intervening through state-owned banks with little lasting impact. It has tried the time-tested "killing a chicken to scare the monkeys" tactic by suspending a couple foreign banks for ostensibly facilitating speculation against the offshore yuan.

    It is difficult to see how the PBOC can address this without sending clear signals that it does not seek further depreciation. Focusing on the yuan's stability against a basket is not particularly useful. When the dollar is rising against that same basket, the bearishness toward the yuan becomes more entrenched.”
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