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Recent comments from the PBoC remind us that the authorities have various tools to deploy to stabilise the CNY, and their rhetoric suggests that China is unlikely to engineer a CNY depreciation as a response to the ongoing trade conflicts, according to Frances Cheung, Research Analyst at Westpac.

Key Quotes

“Indeed, the CNY was fixed for most days in the past couple of weeks slightly firmer than basket moves suggested.”

“There have been reportedly b/s USD/CNY and sell USD flows in the past days, although market participants are not sure if the two are related. If these operations are done together, there will be an effect of supporting spot CNY while not depleting reserves.”

“Market will get to know more about any FX operation when the June forward book is out (should be around end-July). China let previous short forward positions expire, and has been running zero position in its forward book (tenor of 1Y and below) since September 2017.”

“The recent CNY weakness has more to do with the uncertainty emanating from the ongoing trade conflicts, and to a lesser extent the dollar trend and an “easier” policy towards liquidity by the PBoC – the PBoC has changed its stance towards money market liquidity, from keeping liquidity “appropriate and stable” to keeping liquidity “appropriate and ample”.”

“Market is likely to stay cautious in view of the downside risk to growth should trade volume be affected much. While we believe China has the tools to stabilise its currency, sentiment towards the CNY will stay subdued. USD/CNY is likely to trade in a range with the next resistance at 6.76.”