The People’s Bank of China (PBOC) allowed the Chinese currency to increase in value on Monday. This is worth noting, since the CNY had fallen to its lowest level in 6 years, and by nearly 2% versus the USD in October. The Chinese renminbi is a controlled currency, which means that it trades within a band, and cannot move more than 2% in either direction on any one day. The latest move by the PBOC is worth watching, as it could have long term ramifications for the currency, and the Asian FX market in general.
PBOC relieves the pressure on the RMB
Shortly after the decision to allow the CNY to appreciate, the PBOC Deputy Governor said that there is no basis for a continued depreciation of the yuan, and that the yuan is basically stable versus some other emerging market currencies and global reserve currencies. We do not think that this means that the PBOC will step in to boost the CNY in an extreme way after it fell to a multi-year low versus the USD. Instead, the fact that it is explicitly saying that the currency is stable is a signal that it blames the USDCNY decline on a strong USD, not on its own policies. Thus, if the dollar keeps rising then we could see USDCNY continue to make multi-year highs.
The point the Deputy Governor made about the yuan’s stability versus other Asian currencies is true. Over the past month, the renminbi has fallen about 1.55% versus the USD, the South Korean won and the Japanese yen have both fallen by more than double that amount in the same period. In fact, the renminbi has held up fairly well against the rising greenback when you consider that the pound fell by 5.3% versus the USD in October, and the euro was down more than 2%. Because the renminbi made multi-year highs, it seemed to garner a lot of attention, but in reality its move in the face of dollar strength has been fairly muted compared to other currencies.
US election fears could spur PBOC to action
We think that the PBOC may have decided to intervene and speak out about the yuan today for a couple of reasons: 1, to put the yuan move into perspective and shift the focus away from the Chinese currency and towards other weak currencies in Asia and the G10, and 2, in the run-up to the US Presidential election the Chinese authorities may want to protect itself from accusations of currency manipulation.
How to avoid being labelled a currency manipulator 101
The latter point is worth noting. Donald Trump has made rumblings that he would label China a currency manipulator if he wins next week’s US Presidential election. Even a win for Clinton and the Democrats could see China come under scrutiny as a Democratic Congress could react to any proposed threat to American manufacturing jobs. The prospect of China being labelled a currency manipulator could reignite fears about currency wars, which could potentially boost volatility in the currency market. The prospect of enhanced volatility could fill the PBOC with horror, as they try to limit the yuan’s range of movement on a daily basis. Thus, we could see the PBOC gently trying to fix the yuan higher over the next few days and even through to the end of the year, as it tries to eradicate the prospect of a global currency war and being labelled a currency manipulator.
What does this mean for the FX market?
We may have seen a high in USDCNY for now, and this pair could engage in a gentle move lower in the coming weeks. Since the yuan tends to have an important impact on the overall direction of the Asian FX market (bar the yen), any sign that it may start to move higher could trigger a gentle appreciation across Asian FX including the Malaysian ringgit, Singapore dollar and Philippine peso.
Overall, we may have seen a low for Asian FX, but any appreciation is likely to be slow and extremely gradual if the PBOC has anything to do with it.