BNY Mellon: Key Week for CNY

26 februari 2019

As noted in mid-December, there are occasions when forward outrights can provide a useful barometer of changing sentiment within a managed FX regime.

This proved the case within the European Exchange Rate Mechanism back in the 1980s and early 1990s and, arguably, for USD/CNY over the past decade and a half.

The usefulness of forward outright pricing as an indicator of changing thinking was made apparent again in the run up to the end of 2018 when the USD/CNY NDF market indicated that investors were becoming increasingly convinced that the authorities would be able (with the support of the Fed) to prevent the USD from appreciating beyond the line in the sand at CNY 7.00.

Since then, the recovery in sentiment towards the CNY has been sufficiently robust that the one-year NDF points briefly moved into negative territory in the middle of last week.

To put this into context, since March 2012 - the point at which the seven-year rally in the CNY against the USD finally began to lose momentum - there has only been one very brief period in the summer of 2014 when the one-year NDF points turned even briefly negative (see chart above).

Some idea of the relative weight the authorities give to indicators such as this emerged in mid-January. MNI (quoting a “source close to the PBOC”) reported that the bank did not want a sharp appreciation by the CNY and that the current rally could be capped at about CNY 6.7 to the USD.

Coming after one of the sharpest weekly declines seen in the USD against the CNY since the mid-1980s this is understandable enough.

However, the continued pressure on the forward outright points that was apparent at the time might have provided additional impetus in getting the message out in timely manner. 

With the USD falling back below the CNY 6.7 level yesterday following the news over the weekend that the US will delay the increase in tariffs set for March 1, this question is likely to come even more into focus in the next few days (particularly given the upcoming semi-annual testimony from Fed Chairman Jerome Powell).

For the moment, however, it appears investors remain uncertain whether Beijing will be happy to allow a sustained CNY rally from here, given that the one-year NDF points remain (just) in positive territory.

There will consequently likely be an increased focus this week on what, if anything, the PBOC does next.