Markets are suddenly shocked by the pace of yuan devaluation, from HSBC:
The RMB’s weakness has been gathering speed. As we highlighted only a few days ago, USD demand was seen remaining strong in the near-term with the market also scanning for clues as to how accommodative China’s FX policy will be. Today’s higher than expected USD-CNY reference rate suggests FX policy could be becoming more flexible sooner rather than later – which would be a critical development for the RMB. We see USD-CNY finishing 2016 at 6.70 with greater flexibility.
Fixation with the fix
China’s USD-CNY fix was 6.5314, 145pips higher than the previous day’s fix and was much higher than many in the market had been expecting. It was the seventh consecutive day that the fix was raised. Nonetheless, the market was taken by surprise as 1) yesterday’s fixing was lower than expected, which was probably a sign of the PBoC’s policy preference for temporary stability in the currency after a sharp equity sell-off; and 2) it was reported by Bloomberg that Chinese banks were offering USD during the London trading session overnight, which the market usually associates with agency activities on behalf of the central bank.
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The RMB’s weakness has been gathering speed. As we highlighted only a few days ago, USD demand was seen remaining strong in the near-term with the market also scanning for clues as to how accommodative China’s FX policy will be. Today’s higher than expected USD-CNY reference rate suggests FX policy could be becoming more flexible sooner rather than later – which would be a critical development for the RMB. We see USD-CNY finishing 2016 at 6.70 with greater flexibility.