(06 AUGUST 2018)DAILY MARKET BRIEF 2:PBoC introduces reserve requirement amid strong Yuan depreciation

rade tensions are intensifying, as China takes retaliatory measures, announcing additional tariffs on USD 60 billion of US imports ranging from 5% – 20% following latest threats from US side to implement a 25% tariff on USD 200 billion Chinese imports. But despite further US trade balance deficit, Asian markets pay the costs, with Shenzhen and Shanghai Composites closing at -2.08% and -1.29% respectively, Shanghai CSI 300 given at -1.27% and South Korean Kosdaq decreasing by -0.94%. Additionally, the CNY depreciation rally seems far from finished.

Accordingly, in an attempt to stabilize the currency, the PboC introduced a new measure imposing a 20% reserve requirement ratio on CNY in the forward market. Similar measures were undertaken in 3Q 2015 when the yuan went under pressure, but the relief was short-lived, as selling pressures rekindled a few weeks later.

Therefore, despite continued trade tensions, it is expected that the USD/CNY depreciation will stabilize at some point. The PBoC will be taking the necessary actions to maintain the currency below psychological level at 7. Currently trading at 6.8455, USD/CNY is showing further strength for now. We would however expect the pair to weaken slightly in the short-term, heading along 6.8220.