China: Strong Reasons for the PBOC to Stay the Course - ING
Tim Condon, Chief Economist at ING, assumes that the PBOC is likely to
keep the NEER steady and ING’s forecast that USD/Majors will be range
bound is behind their yearend 6.47 USD/CNY forecast.
Key Quotes
“We
credit more predictable PBOC USD/CNY fixings since the second week of
January and the tightening of exchange controls/macropru for the swing
in monthly reserve changes from US$100 billion per month of outflows in
November-January to a US$10.3 billion inflow in March. The first
increase in five months put reserves at US$3.213 trillion.
We
think there are strong economic and political reasons for the PBOC to
stay the course when it comes to its fixing policy. There is some
uncertainty about what that course is, however. Estimates of the CFETS
NEER currency basket, including ours, show a steady depreciation since
March, which has been a period of general USD/Majors (DXY) weakness.
When
DXY depreciates the PBOC should fix USD/CNY lower (appreciate CNY) to
keep the NEER steady and vice versa. However, we think the PBOC reacts
asymmetrically to changes in DXY: when DXY depreciates the PBOC
depreciates the NEER by fixing USDCNY higher than would be consistent
with an unchanged NEER. We think it keeps the NEER stable when DXY
appreciates; it fixes USDCNY higher (depreciates CNY) to keep the NEER
steady.
We also think this is more of a guideline than a rule.
If were a rule it would have implied a CFETS NEER depreciation yesterday
after DXY depreciated 0.21%. Instead, on our measure the NEER
appreciated. We attribute the PBOC’s departure from the rule as a
reaction to an unwanted widening in the CNH-CNY basis associated with
the recent NEER depreciation. In the event, the basis narrowed on last
Thursday.
For forecasting purposes we assume that the PBOC keeps
the NEER steady. That and ING’s forecast that USD/Majors will be range
bound is behind our yearend 6.47 USDCNY forecast (spot 6.47, Bloomberg
median 6.71, forward 6.62).”
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