Yuan Eyes on FOMC, Fed Talks – Watch Key Markets for Next Moves
Fundamental Forecast for the Yuan: Neutral
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The onshore Yuan rate (CNY) advanced 0.89% this week against the US Dollar, the largest weekly gain since April 2015. The offshore Yuan (CNH) closed higher on Friday as well. Both advances were largely driven by US Dollar weakness following dovish commentary from US Federal Reserve Chair Janet Yellen. The People’s Bank of China set Yuan’s daily reference rate to the strongest of this year at 6.4612 this Thursday. Next week, China will release foreign reserves and foreign investment data and its major counterpart in US will have multiple central bank officials releasing commentary along with minutes from its recent meeting. All these events could drive Yuan moves in the onshore and offshore markets.
Last week, we discussed that Chinese Yuan tracks market moves more closely: the volatility in Yuan’s reference rate has increased significantly lately. The trend has continued over the past week. PBOC set USD/CNY daily reference lower by 172 pips on Tuesday, 219 pips on Wednesday and 229 pips on Thursday to reflect the overnight Dollar weakness in the global market. The moves of Yuan’s daily reference rate were in line with the moves of offshore Yuan rate (USD/CNH) one day earlier. The daily change of USD/CNH from March 28 to 31 (T) were -0.0070 pips, -0.0267 pips, - 0.0156 pips and -0.0097 pips respectively; the change in Yuan’s reference rate from March 29 to April 1 (T+1) were -0.0172 pips, -0.0219 pips, -0.0229 pips and -0.0027 pips respectively. Despite the fact changes in two rates are not exactly the same, they move along the same direction and in scale. This adds evidence to a suspicion that China’s Central Bank has referred more to moves in the global market to guide onshore yuan rates as well as to influence offshore rates. Next week, global top events such as FOMC statement and Fed official talks could use as further illustrations of the flexibility in Yuan’s reference rate.
Next week, China will release foreign reserves readings in March, which will reveal the capital outflow pressure on the country. Improvements seen in China’s equity markets in March are likely to ease the pressure. However, stabilizing domestic financial markets will still be the key theme over the following periods, as it is the basis for China to work on other major issues. According to the 1Q report released by Chinese Monetary Policy Committee on April 1, a target of “innovation and reform” has been removed from the statement compared to in the last quarter. In addition, in the country’s Fiver-Year Plan published on March 17, a target of introducing a new board of strategic emerging industries is removed in the final version.
In the current stage, the Chinese government has several priorities: within the country, it needs to support the slowing economy and assist transforms in manufacturing industries; in the global market, it need to let the currency get prepared before it officially joins the SDR basket on Oct. 1, 2016. Therefore, regulators become increasing cautious to introduce any new system at the equity market in the effort to prevent turbulence similar as those cause by the circuit-breaker system in this January. A stabilized equity market is good for Yuan’s internationalization development. In fact, PBOC Governor Zhou Xiaochuan said on April 1 that in the near future the regulator will issue a new foreign reserves report based on SDR basket,as well as introduce SDR-denominated bonds in China.
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