FXStreet (Delhi) – Research Team at Deutsche Bank, notes that on December 11th China’s Foreign Exchange Trade System (CFETS) published a new CNY effective exchange rate (CNY CFETS basket). Key Quotes “According to the CFETS statement, the intention was to “shift how the public and the market observe RMB exchange rate movements” with the focus moving from a bilateral USD/CNY exchange rate to a trade weighted index which was seen to better “reflect the overall value change of that currency” and “better capture the competitiveness of a country’s goods and services.” The timing of the basket announcement – the weekend before the Fed likely raises rates – was no coincidence, in our view. As monetary cycles between US and China diverge, authorities in China are intentionally discouraging the market’s preoccupation with USD/CNY rate, which they are unlikely to keep stable in view of narrowing rate differentials. According to DB forecasts, the Fed is expected to hike rates by 100bps by end-2016, while we are penciling in 50bps of further cuts from PBOC. Based on simple historical relationships, a 100bps narrowing in the rate differential has been associated with a 30 big figure move higher in USD/CNY in the past With China encouraging the market to shift its focus to a basket, the message authorities are sending is that if the USD is strengthening against trade partner currencies, USD strength against CNY can also follow, and should not be seen as depreciation. In other words, keeping the CNY basket “basically stable” could entail USD/CNY upside, should the USD be moving up against basket currencies. Authorities do seem to be managing changes in USD/CNY spot more closely with the change in CNY CFETS basket recently. After periods of large appreciation in the CNY CFETS basket, authorities have a tendency to encourage USD/CNY upside, particularly once the basket crosses the 102 threshold in absolute terms. This was clearly the case around the August 11th devaluation when policymakers appear to have attempted to close the YTD gap between CNY CFETS basket and USD/CNY, both level terms, and in YoY % terms. Furthermore, our calculations show that the beta of the USD/CNY daily change to the CNY TWI daily change has been around 54% YTD, but the beta increased to 73% after 11th August.” For more information, read our latest forex news.