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26 Feb 2014
Flash: Yuan weakness should not spook markets - BBH
FXStreet (Bali) - According to Dr. Win Thin, global Head of Emerging-Market Strategy at Brown Brothers Harriman, and Ilan Solot, Vice President and Emerging Markets Currency Strategist at the same institution, further yuan weakeness is likely, but won't be large enough to spook markets.
Key Quotes
"Spot USD/CNY closed above the fix today for the first time since September 2012. We saw a prolonged period of this in Q2 and Q3 2012, right after the last band widening. But to keep things in perspective, spot is still closer to the center of the +/- 1 percentage point trading band around the fix rate than it is to the upper band. Further yuan weakening appears likely, but not on a scale large enough to spook the markets."
"Other factors are at work in China currently, making it even harder to read the true intentions of Chinese policymakers. It is interesting to note that China started draining liquidity again over the last week, for the first time since mid-2013. Yesterday, for example, the PBOC conducted a RMB 100 bln operation."
"This draining started around the time when the yuan began to weaken. So one possible interpretation for these events would be that the PBOC could be slightly shifting its support from one sector of the economy (bank lending driven construction and real estate, for example) to another (exporters). Recall that inflation in China is well contained, with CPI at 2.5% y/y and PPI at -1.6% y/y in January, so pass-through from a weaker currency is not an issue."
Key Quotes
"Spot USD/CNY closed above the fix today for the first time since September 2012. We saw a prolonged period of this in Q2 and Q3 2012, right after the last band widening. But to keep things in perspective, spot is still closer to the center of the +/- 1 percentage point trading band around the fix rate than it is to the upper band. Further yuan weakening appears likely, but not on a scale large enough to spook the markets."
"Other factors are at work in China currently, making it even harder to read the true intentions of Chinese policymakers. It is interesting to note that China started draining liquidity again over the last week, for the first time since mid-2013. Yesterday, for example, the PBOC conducted a RMB 100 bln operation."
"This draining started around the time when the yuan began to weaken. So one possible interpretation for these events would be that the PBOC could be slightly shifting its support from one sector of the economy (bank lending driven construction and real estate, for example) to another (exporters). Recall that inflation in China is well contained, with CPI at 2.5% y/y and PPI at -1.6% y/y in January, so pass-through from a weaker currency is not an issue."