USD/CNY still the driver as PBOC aims for wider FX focus

While the PBOC recently signaled an overt emphasis on trade-weighted RMB, the FX market continues to take its cue from USD/ CNY moves with today’s higher-than-expected PBOC fix fuelling a broad bid in USD/AXJ after a circumspect reaction to the Fed’s rate hike and dovish dot plot. The fix is up 1.4% since December 4 as steady gains in onshore spot prompt a self-fulfilling rise in the midpoint. And the CNH-CNY spread is climbing again after yesterday’s sharp pullback as the offshore market prices in a sharper depreciation. 
But the PBOC’s post-SDR comments indicate little appetite for sustained RMB weakness, and as CS analysts note, the government is likely aiming for a stable to very gradually appreciating CNY against the basket. They say a fall in the CFETS basket below 100 (102.93 on Nov 30, est 101.14 Dec 15), on a USD/CNY rise not caused by broad USD strength, would be a signal the PBOC may be shifting to outright basket depreciation.  [IFR] 

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