FXStreet (Delhi) – Sean Callow, Research Analyst at Westpac, suggests that the flat-line USD/CNY fixings since the tumultuous 7 January session return us to the pre-August 2015 set-up, albeit with a smaller misalignment. Key Quotes “This situation could change any day, though only Chinese policymakers know when. The end of this uneasy calm on USD/CNY will surely hurt AUD and Asian currencies. USD/CNY was fixed at 6.5646 on 7 January, a fresh high since 2011 and on the high side of expectations on the day. This contributed to the nerves that drove the Shanghai Composite down 7% in just 30 minutes before closing for the day. Clearly this was a watershed day not just for China equities, with the short-lived circuit-breakers experiment dumped that very evening but it has also proven to be the USD/CNY fixing high so far in January. Since that day, the USD/CNY midpoint (fixing) has tracked a tight range of 6.5578 (today) to 6.5637, less than 0.1%. This stability on the daily fixing has helped calm markets, with equities choppy but broadly range-bound and the yuan steadying, both onshore and offshore (CNH is the strongest Asian currency since 7 January, +1.3%). USD/CNY daily trading volumes on CFETS have dropped accordingly, from $38.6bn on 7 Jan to $16.2bn on 19 Jan. But we can’t help feeling some déjà vu. The lowest spot USD/CNY has traded since 7 Jan is 6.5668. Given the 6.5578-5.5637 range for the fixing rate, not a single trade has occurred at the benchmark rate. We still expect the yuan to become increasingly market-determined over time. But the past couple of weeks provide another reminder of the difficulties Chinese policymakers are having moving towards a market-driven currency after so many years of keeping USD/CNY on a very short leash and thereby producing side effects in terms of investment decisions and market positioning. Our baseline scenario for 2016 has been for the yuan to depreciate modestly (say 3-4%) against USD but see limited change in TWI terms. Risks to this are skewed to more substantial depreciation, with growth sluggish and inflation low. Shorter term, it is sensible to expect USD/CNY fixings to hover around 6.56 until further notice. But any given day holds the risk of a relatively sharp move, with a notably higher USD/CNY the most likely outcome. Hence the risks for the likes of AUD, NZD and Asian currencies around the daily CNY fixings are skewed firmly to the down side.” For more information, read our latest forex news.