China: Yuan tension rising - Westpac

Sean Callow, Research Analyst at Westpac, suggests that the AUD/USD’s return to early March levels needs to be seen in the context of this month’s recovery in the US dollar.

Key Quotes

“This week the Korean won fell to its weakest point against USD since the FOMC’s 16 March meeting, as did the Singapore dollar. But generating most headlines was the decline in the the Chinese yuan, particularly the midpoint of the daily trading band, or fixing rate. While both the onshore CNY and off shore CNH remain clearly firmer than January’s lows (USD highs), the fixing rate on Wed was just short of 6.57, the weakest yuan level since 2011. (USD/ CNY slipped back somewhat on Thursday).

It is important to note that USD gains against a range of currencies mean that the trade-weighted yuan has been fairly stable in May. Yet this comes after steady CNY TWI depreciation from Dec 2015 to April 2016. In late 2015 and early 2016 there was of course great concern over capital outflows from China, with the PBoC’s FX reserves falling $323bn between Oct 2015 and Feb 2016.

The fall in USD in March and April (as expectations for Fed rate hikes waned) was a very benign backdrop for Chinese policymakers. They were able to lower the USD/CNY fixing steadily, thus calming jittery local investors, but gently enough for CNY TWI to depreciate. Now the pressure is returning as USD recovers on a slew of Fed commentary about raising rates, which is finally gaining some traction in market pricing (100% priced by year-end).”