USD/CNY Monthly Fundamental Forecast – March 2016

The USD/CNY  has dipped 0.34% for the month after the PBOC surprised markets on the last trading day dropping its reserve rate. The pair ended at 6.554. The G20 meeting did not discuss about RMB. Thus, the PBoC may not intervene the FX market aggressively, to prevent further loss of FX reserves. Besides, fund outflows from China on concerns over China’s economic outlook may also undermine the RMB. l Although the PBoC may pause rate cuts and cuts in the RRR in order to avoid a plunge in RMB, the PBoC may inject liquidity into markets through other measures, which may increase RMB’s downside pressure.

As China transitions to a services and consumption focused economy, officials recognize the need for more flexible prices for money Markets anticipate the close link between the yuan and the dollar to inject an unwanted tightening impulse in the rising dollar environment. There is a significant change in the market now that China is experiencing capital outflows, yet China should not use this as a pretense to devalue and then re-link to the dollar when the greenback’s cycle turns.

The beginning of 2016 was dominated by concerns about the Chinese currency. The Yuan depreciated by roughly 1.5% against the Dollar in the first two weeks of January. While such a move against the USD is not big for emerging markets in general, it is a considerable change for the Yuan, which is still controlled to a large extent by the central bank. The People’s Bank of China (PBoC) changed its exchange rate regime again in December 2015. It moved the target away from the bilateral exchange rate CNY/USD as it wants to achieve a stable currency vis-à-vis a broader basket of currencies. This implies that the PBoC is no longer willing to let the CNY appreciate together with the USD. Moreover, if the USD strengthens going forward, the PBoC will most probably let the Yuan depreciate against the USD in order to avoid a broad-based appreciation of the Yuan

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March 1, 2016