DXY matters when it comes to CNY – ING

FXStreet (Delhi) – Tim Condon, Chief Economist at ING, suggests that in the absence of any obvious policy change by the PBOC, our explanation of the continued widening of the divergence between the USDCNY and USDCNH forward curves is the DXY rally.

Key Quotes

“The 3.5% DXY depreciation from end-July to mid-October was contagious for USD/AXJ, which made it easier for PBOC policy to calm CNY depreciation expectations. The subsequent 5.3% DXY appreciation was equally contagious for USD/AXJ but instead of increasing the efficacy of PBOC policy, it undermined it.”

“We have Premier Li himself to thank for tightening the link in investors’ thinking between DXY appreciation and USD/CNY appreciation. Speaking at the Summer Davos in September he said: “Since the formation of this government, the real effective exchange rate (REER) of the RMB has appreciated 15%. As many currencies significantly depreciated against the dollar recently, developments on the international markets compelled us to adjust.”

“The IMF’s article IV put paid to that, finding the exchange rate “no longer undervalued”. Henceforth, if the USD appreciates significantly against most currencies it will appreciate against the CNY.”

“However, we also think the authorities view currency stability as an element of CNY internationalization; excessive fluctuations could slow the CNY’s adoption as a reserve currency. Again, we view this as consistent with something PM Li said at the Summer Davos: “ …after the small [811] adjustment, the RMB exchange rate is now basically stable.” November provided a test. DXY appreciated 2.80% month-to-date and CNY depreciated 1.13%.”

“We forecast USDCNY at 6.55 by the end of 2Q16 when ING forecasts EUR/USD hitting 98 and USDJPY hitting 125. ING forecasts a slightly lower move in the USD against major currencies in the remaining two quarters, which we expect will be associated with a slightly lower move in USD/CNY. We forecast USD/CNY then moving back to 6.40 by end-2017 when ING forecasts the USD depreciating further against the EUR and the JPY.”

Tim Condon, Chief Economist at ING, suggests that in the absence of any obvious policy change by the PBOC, our explanation of the continued widening of the divergence between the USDCNY and USDCNH forward curves is the DXY rally.

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