FXStreet (Bali) – The ANZ Research Team notes that there is a fine balancing act for the Chinese authorities to ensure that Yuan depreciation expectations do not become entrenched as it may lead to a pick-up in capital outflows and further RMB depreciation.
Key Quotes
“The RMB reform can partly be seen as a measure to strengthen the case for its inclusion in the IMF’s reserve currency basket (SDR) later in the year.”
“By changing the way the central parity rate (i.e. the fix) is set, from one that is determined by the authorities to one that is more closely based on the onshore spot rate, it ensures that the new fixing better reflects market realities.”
“But the other more important near-term reason for bringing forward these changes is to help ease financial conditions, in light of the weakness in the export sector, which slumped 8.3% y/y in July.”
“While the PBoC says that 1.9% depreciation (the largest change in nearly 20 years) is a one-off adjustment, the big question is how far the authorities will tolerate further RMB depreciation.”
“We note that the PBoC statement mentions the need for some time for the market to adapt to the change, so we suspect the PBoC will ensure markets do not get too carried away.”
“But there is a fine balancing act for the authorities to manage, to ensure that depreciation expectations do not become entrenched, which will lead to a pick-up in capital outflows and further RMB depreciation.”
(Market News Provided by FXstreet)