Fundamental Forecast for the Yuan: Neutral
Both the offshore (CNH) and onshore yuan (CNY) rates closed higher on Friday after China’s central bank raised the yuan reference against the dollar to a one-month high of 6.5314. Looking forward from February 7 to February 13, Chinese financial markets including equities and onshore exchanges will be closed for the Lunar New Year; the offshore yuan market will be open with normal hours. PBOC will NOT publish the daily yuan reference rate during the holiday week. However, this does not mean that PBOC will not intervene the offshore foreign exchange market if they see excessive volatility. As Chinese domestic markets will be relatively quiet in the coming week, major event risk for the yuan will likely come from overseas with specific focus on Japan and the world’s largest economy, the US.
The PBOC’s latest moves on the Yuan reference rate have sent out two important signals: 1) the regulator remains consistent with its earlier statement that “China has no intention to devalue the currency or start a trade war,” despite the recent Yuan short speculation. And 2) the central bank has made preparation for potential Yuan shorts during the holiday season; the pace of raising the reference rate was increased in the past two days. The reference rate was stronger by 105 basis points on Friday and 102 basis points on Thursday compared to an average 15-bps daily move over the past 19 days after the central bank began to stabilize the currency. This 200 point-range provides a buffer area for Yuan moves even without a reference rate. This is like leaving home for vacation and you know that the weather will be colder in your home upon your return, so you turn on the heat before you leave in preparation. Setting the reference higher is the PBOC turning on its heat before leaving for the holiday. Investors and traders should not be surprise to see “cold weather” in the coming days, which for Yuan is a bearish position.
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