Mansoor Mohi-Uddin, Senior Market Strategist at RBS, notes that the
Chinese authorities have fixed the rate almost lower each day since the
start of November when it was set at 6.3154.
Key Quotes
“The PBoC is thus allowing the market more influence in determining the onshore fixing rate - as policymakers intended in August when the yuan was devalued and the PBoC said the fix would be determined by the previous day’s onshore close and changes in major currencies.”
“November’s FX reserves data help explain the authorities’ shift. Last month reserves fell US$87bn from $3,525bn to $3,438bn. $25bn of the decline is likely to have been caused by valuation effects – the PBoC appears to hold 30% of its reserves in non-dollar currencies and the dollar index DXY rose more than 3% in November. But with China recording a trade surplus of $54bn last month and likely incurring inward FDI of another $10bn, broad capital outflows appear to have exceeded $120bn in November.”
“FX reserves are still far above the minimum $1.6trn deemed adequate by the IMF when accounting for external debt, export losses and broad money conversion risk. But November’s fall in reserves suggests capital outflows were again high as Chart 2 shows. The offshore yuan rate has weakened to 6.49 against the dollar and the authorities have allowed the onshore rate to reach 6.42 by fixing the daily rate successively lower in the face of high capital outflows.”
“We expect both exchange rates to keep falling near term with the yuan reaching 7.00 next year. First, the Federal Reserve’s hikes will exacerbate capital outflows. Second, the IMF’s warnings on excessive spreads will prompt the PBoC to let the onshore rate keep falling towards the offshore yuan rate.”
Key Quotes
“The PBoC is thus allowing the market more influence in determining the onshore fixing rate - as policymakers intended in August when the yuan was devalued and the PBoC said the fix would be determined by the previous day’s onshore close and changes in major currencies.”
“November’s FX reserves data help explain the authorities’ shift. Last month reserves fell US$87bn from $3,525bn to $3,438bn. $25bn of the decline is likely to have been caused by valuation effects – the PBoC appears to hold 30% of its reserves in non-dollar currencies and the dollar index DXY rose more than 3% in November. But with China recording a trade surplus of $54bn last month and likely incurring inward FDI of another $10bn, broad capital outflows appear to have exceeded $120bn in November.”
“FX reserves are still far above the minimum $1.6trn deemed adequate by the IMF when accounting for external debt, export losses and broad money conversion risk. But November’s fall in reserves suggests capital outflows were again high as Chart 2 shows. The offshore yuan rate has weakened to 6.49 against the dollar and the authorities have allowed the onshore rate to reach 6.42 by fixing the daily rate successively lower in the face of high capital outflows.”
“We expect both exchange rates to keep falling near term with the yuan reaching 7.00 next year. First, the Federal Reserve’s hikes will exacerbate capital outflows. Second, the IMF’s warnings on excessive spreads will prompt the PBoC to let the onshore rate keep falling towards the offshore yuan rate.”
