USD/CNY hits a glass ceiling - Westpac

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 21, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) – Sean Callow, Research Analyst at Westpac, notes that the midpoint of the daily USD/CNY trading band has been very stable since the drama of 7 Jan when it printed a fresh high since 2011 and contributed to the rapid 7% slide in Chinese equities, prompting the daily limits to be dumped.

    Key Quotes

    “This stability on the daily fi xing has helped calm markets, with equities choppy but broadly range-bound and the yuan steadying, both onshore and off shore (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 $18.8bn on 20 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 fi xing rate, not a single trade has occurred at the benchmark rate. As the chart shows, this was also the situation in the months preceding the August 2015 “devaluation”/realignment (and indeed as far back as Dec 2014). So each day in both periods, the midpoint of the trading band has been set on the strong CNY/weak USD side of where the pair has traded for its entire session.

    When the recent return to the pre-Aug 2015 USD/CNY fi xing approach will end is anyone’s guess. The record -$107.9bn m/m fall in PBoC FX reserves in Dec (-$513bn over the year) is not a sustainable situation, arguing for a less active hand in FX markets. Clearly the underlying dynamic is for capital outfl ows to exceed China’s trade surpluses, chipping away at CNY.”
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