1. Recent disappointing data releases could be a reason, although it is unlikely to be a major factor as the poor data form, especially in exports and manufacturing related sectors, has been around for some time. Of note is that China’s headline GDP reports for 1Q15 and 2Q15 surprised on the upside, suggesting that the non-manufacturing sectors are now taking the lead, and that a weaker currency may not be of great help in a situation where domestic demand and services sector play an increasing role.
2. The latest US nonfarm payroll report on Fri (7 Aug) strengthened expectations for a US interest rate hike in Sep, which provided support for the USD strength story that has been in place since mid-2014. At the same time, the trade-weighted RMB has maintained its strength while other currencies fell against the USD in response to such development. Since 1 Jan 2014, the trade-weighted RMB has strengthened 6%, compared to the 5% decline in broad Asian currency index
in the same period. This means that the latest move for the RMB fixing was a one-time move to catch up with some of the USD strength during this period.
3. IMF staff report’s proposal on 4 Aug (for details, please see our report: “China: IMF Throws Roadblock on RMB’s SDR Ambition) to extend the current Special Drawing Rights (SDR) basket to Sep 2016 for operational reasons, may have spurred China to undertake further market liberalization measure, of which the change in RMB fixing methodology would be one of these initiatives. “UOB”
With this move, we foresee the following points going
1. USD/CNY and USD/CNH have scope to go higher.
Although the PBOC said this adjustment to the fixing
rate is one-off, we believe this could be the start of
small incremental fixings to the upside. With CNY and
CNH only down 1.50% YTD against the greenback
while other Asian currencies like JPY and SGD have
already slided more than 4% YTD, we think USD/CNY
and USD/CNH has room to play “catch-up”.
2. The spread between onshore CNY and offshore CNH
is likely to narrow significantly as part of PBOC’s
direction going forward.
3. A weaker exchange rate might boost China exports.
4. In the near-term, Asian currencies are likely to be
guided lower by the Chinese Yuan. This morning, we
saw the USD/SGD traded to new 52-week high above
1.3850. MYR, IDR and THB also lost ground. ADXY,
which is 41% composed of CNY is likely to resume its
downtrend in an aggressive manner.
5. The much talked about CNY band widening (currently
at 2% on either side of the onshore fix) although still
on the table is likely not to be implemented soon as
the PBOC avoids pulling too many levers at a time.