“It seems the central bank is allowing the yuan to be more responsive to news, data and ad hoc information, which means the yuan is more flexible. This should imply the central bank doesn’t intervene frequently,” note ING analysts.
Key quotes
“But the central bank could be intervening with a target. This is more interesting because the market then wants to know what the ‘target’ is. Is USD/CNY at 7.0 a target or is there a line below that?”
” We think the central bank could be targeting small ranges that would lead USD/CNY to cross 7.0. For example, 6.91- 6.95 might be a target range for a certain period, then a weaker yuan range of 6.95 – 7.00 for later, so that eventually, USD/CNY crosses 7.0 without surprising the market. Therefore, we don’t agree that the People’s Bank of China won’t allow USD/CNY to cross the 7.0 handle.”
“We believe USD/CNY will depreciate when trade war tension escalates, and crossing 7.0 looks increasingly likely. The central bank is more likely to be managing market sentiment by making sure the exchange rate doesn’t surprise the market. The scale of interventions will become smaller as the exchange rate approaches 7.0 so that foreign exchange reserves only fall mildly.”
“For now, we maintain our forecast at 7.0 by the end of this year.”
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