Irene Cheung, Senior FX Strategist at ANZ, notes that since returning from the Lunar New Year break, the USD/CNY fixings have become more volatile.
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“We suspect there has been a change in the way the fixing is set, which would mark the third change to the central parity formation since August last year.
We can only hazard a guess as to the reason behind this change. Perhaps the intention is to keep the market guessing and to use the fix more to guide the market rather than having it being guided by the market.
There is certainly more prominence being given to the RMB Exchange Rate Index. The RMB index has fallen below the 100 level in early February and has stayed within a fairly narrow range since. It is not clear to us whether there is any intention to target a particular level or range in the RMB index.
Official comments regarding RMB stability have been made in reference to the RMB index as opposed to against the USD. We note that the RMB index has stayed remarkably stable at around the 99.4 handle since last Thursday. If the new fixing regime is to keep the RMB index stable, then that means the volatility will get pushed into the USD/CNY fixing.
Currency stability remains a policy priority at this stage, and the authorities are reluctant to undertake monetary easing (RRR and interest rate cuts) as that would put depreciation pressure on the currency.
However, we continue to see risk of upward pressure on USD/CNY for two main reasons. First, we expect the USD to rebound as the market reprices in the risk of Fed tightening (we expect a June rate hike). Second, until the Chinese economy shows signs of stabilising or rebounds, the pressure for monetary easing – both on the FX and interest rate fronts – remains.”
