PBOC Prepared the Yuan Ahead of One-Week Holiday
Fundamental Forecast for the Yuan: Neutral
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Both the offshore (CNH) and onshore yuan (CNY) rates closed higher on Friday after China’s central bank raised the yuan reference against the dollar to a one-month high of 6.5314. Looking forward from February 7 to February 13, Chinese financial markets including equities and onshore exchanges will be closed for the Lunar New Year; the offshore yuan market will be open with normal hours. PBOC will NOT publish the daily yuan reference rate during the holiday week. However, this does not mean that PBOC will not intervene the offshore foreign exchange market if they see excessive volatility. As Chinese domestic markets will be relatively quiet in the coming week, major event risk for the yuan will likely come from overseas with specific focus on Japan and the world’s largest economy, the US.
The PBOC’s latest moves on the Yuan reference rate have sent out two important signals: 1) the regulator remains consistent with its earlier statement that “China has no intention to devalue the currency or start a trade war,” despite the recent Yuan short speculation. And 2) the central bank has made preparation for potential Yuan shorts during the holiday season; the pace of raising the reference rate was increased in the past two days. The reference rate was stronger by 105 basis points on Friday and 102 basis points on Thursday compared to an average 15-bps daily move over the past 19 days after the central bank began to stabilize the currency. This 200 point-range provides a buffer area for Yuan moves even without a reference rate. This is like leaving home for vacation and you know that the weather will be colder in your home upon your return, so you turn on the heat before you leave in preparation. Setting the reference higher is the PBOC turning on its heat before leaving for the holiday. Investors and traders should not be surprise to see “cold weather” in the coming days, which for Yuan is a bearish position.
But remember, this does not mean that guidance on the exchange rate will be foregone, especially if the Yuan rate becomes too volatile. So even though they’re on vacation, someone will still be watching the house; just in case. The central bank will keep a close eye on the currency and use other tools to defend it if massive Yuan selling begins. The PBOC can use open market operations in offshore markets, just as they hit HIBOR with a 66.82% rate less than a month ago to shake short-sellers out of the market.
As Chinese financial markets will be closed next week, event drivers for the Yuan will likely come from abroad next week. Without a Daily reference rate from PBOC to guide the Yuan, market forces may play a larger role than usual. Japan is the only major country in Asia that doesn’t celebrate the Lunar New Year; South Korea and Singapore both do. The BoJ has no scheduled announcement next week, but Japan’s trade figures will be released and China is one of its largest trade partners, so this could have some Yuan impact. From the US side, the big event is Federal Reserve Chair Yellen’s twice-a-year testimony in front of Congress. Her tone on monetary policy will move the dollar pairs, including USD/CNH.
Overall, the Chinese yuan is likely move lower over the next week without the daily guidance; unless its counterparties fall significantly driven by key events.
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