I’m not sure it will ultimately be enough to get the job done, all things considered, but the PBoC’s decision to effectively remove a barrier to speculation against the yuan (that’s a crude way to describe it, but it gets the point across) by cutting a reserve requirement put in place in the days following the devaluation in 2015 seems to have succeeded in putting the brakes on the rally – if only for a day.
It also didn’t hurt that the PBoC set the fix weaker than expected. The reference rate was strengthened by 0.05% to 6.4997 on Monday versus estimates of 6.4834. That said, the PBoC has strengthened the reference rate by 2.4% over an 11-day stretch, the longest run of stronger fixings in history.
So despite the obvious appreciation pressure, between the weaker-than-expected fixing and the psychological effect the removal of the reserve requirement on FX derivatives is exerting, the offshore yuan is down the most against the dollar since February…
…while USDCNY is up the most since early 2016, which you’ll recall was the last time the depreciation pressure was really intense…
Notably, O/N CNH Hibor rose 78 bps — the most since June 1 — to 2.29433%. “Removal of reserve requirement on FX forwards will likely lead to a widening of USD/CNH-USD/CNY spot near term, which may drain CNH liquidity,” Becky Liu, head of China macro strategy at Standard Chartered in Hong Kong said.
Anyway, we’ll see.
For today at least, the yuan is on the defensive.