Meanwhile, In China: “Relentless, All-Round” FX Shenanigans

The PBoC was at it again this week.

Although this story was lost in the procession of DM central bankers expounding upon their newfound hawkishness, the yuan was the target of repeated spot market interventions over the last several of days.

Take this headline, for instance, that crossed on Wednesday evening:

  • USD/CNY Seeing Relentless Selling After Opening, Traders Say

And then, 24 hours later, it was the same thing:

To be sure, this was easy to see coming. It started a little over a week ago when it became apparent that policy banks were selling dollars into 4:30 p.m. (local time) in an effort to support the yuan into the timestamp the PBoC uses to set the next day’s fix.

Here’s what that looked like on June 20:


As a reminder, China engineered an epic short squeeze in late May/early June by adopting what they’re euphemistically calling a “counter-cyclical adjustment factor,” which amounts to an effort to reduce the role the previous day’s spot plays in determining the next day’s fix. In effect, it was a rather ham-handed attempt to roll back the liberalization push they embarked on in August, 2015.

And it worked – for a couple of days.

But then, the spot closed at a discount to the fix for 17 consecutive sessions…


… and in a related development, the offshore yuan reversed the artificially large premium to its onshore counterpart and eventually traded at the largest discount since January…


In other words, the fix wasn’t doing enough to support the spot and in an effort to avoid setting the fix so strong that it alarmed markets, the PBoC started intervening in the spot market. That way, they could push the spot stronger into the 4:30 official close and reference that artificially strong spot price to set the next day’s fix, to which they would apply the new “adjustment factor” for a little extra juice.

So on Tuesday they intervened and then over the next few days, USDCNY came under “relentless” pressure right out the gate as noted here at the outset.

Here’s Bloomberg with more color:

China threw a lot at the yuan in June, tussling with traders to drag the currency higher.

Starting the month at a 2017 high, the yuan lost 0.6 percent to the dollar over the next two weeks as bearish bets returned on concern China’s economic growth may have peaked. That seemed to trigger a reaction from the People’s Bank of China, with the authorities speculated to have intervened on at least three occasions over the past two weeks, driving the yuan to its strongest level since November.

But those gains — which continued Friday amid more suspected yuan buying — have done little to shake the view among strategists that the currency is destined for further weakness.


Ok, so they intervened three days in a row this week and guess what? The onshore spot closed at a premium to the fix all three days:


This of course came during a week when the dollar was already under pressure. In that context, consider this from Wells Fargo:

We would expect the PBOC to remain somewhat active, intervening in the currency market at times. This will likely occur during periods of renminbi underperformance. If the renminbi does not strengthen noticeably during periods of dollar weakness, we would expect further intervention on occasion from the central bank to encourage that renminbi strength.

Of course the more important takeaway is that this is set against a backdrop of PBoC tightening (the effort to rein in speculation and leverage in the country’s elephantine shadow banking complex).

They cannot, simply put, add “capital flight” to the list of fires they’re trying to fight, which means the kind of blatant intervention described above isn’t going away anytime soon. As SocGen’s Jason Daw noted earlier this week, anyone tempted to get long dollars should watch for signs the PBoC is attempting to engineer another funding squeeze like what we saw late in May and during the first couple of days in June.



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