Week in FX Asia – Wave a Red Flag To The Yuan

There was a lot of noise and very little new information surrounding the Chinese Yuan this week. Most of the noise came from within the Central Bank ‘circle.’ The governor of the PBoC Zhou Xiaochuan discussed widening the trading bands around the USD/CNY fix and possibly reducing the Central Bank’s intervention in the market in a published white paper on “financial and currency market liberalization.” His second in command added further excitement to the highly controlled currency by stating that it was no longer in “China’s favor to accumulate foreign exchange reserves.”

The market ‘read and listened,’ but so far it has not gyrated too far from the previous expectations of a gradual appreciation of the CNY outright or an imminent widening of the trading bands. Why not? Zhou’s article is being perceived as a statement of intent of a gradual, multi-year reform program, nothing immediate. Any Chinese financial liberalization is expected to come at a pace that the government feels comfortable with. Governments like growth. Progressive global growth is a necessity; it needs to lead to faster growth in Chinese exports, more than what currently exists. This week, weaker than expected flash HSBC’s China PMI suggests that the country’s tepid growth (+5.6%) may even slow further over the coming months. Regarding intervention, unless authorities are willing to allow rapid CNY appreciation (highly unlikely and to the dismay of some US politicians), there really is no choice but having the PBoC to intervene.

The Yuan is ending the week with limited losses because market participants remain cautious as they wait for more details to emerge on the announced financial and currency reforms. Everyone continue to focus on the word “gradually.” The Yuan has risen +2.3% this year, and one-year dollar/Yuan non-deliverable forward contracts rose to 6.1490/6.1520 from 6.1440/6.1465, implying a -0.9% fall in the Yuan value over the next year.

WEEK AHEAD

* USD Consumer Confidence
* GBP Gross Domestic Product
* USD Durable Goods Orders
* CHF Gross Domestic Product
* EUR German Unemployment Rate
* EUR German Consumer Price Index
* JPY National Consumer Price Index
* EUR Euro-Zone Consumer Price Index Estimate
* CAD Gross Domestic Product

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell