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The pace of CNY appreciation following the re-opening of Chinese markets after the Golden Week holidays likely caused a degree of concern among officials. Consequently, the People’s Bank of China (PBoC) announced the lowering of the risk reserves ratio for FX forwards trading (from 20% previously to 0%). Economists at TD Securities see the PBoC move as a means to slow, but not stop, the strength in China’s currency as China still wants a stable to firm currency as a means to attract inflows and maintain domestic confidence.

Key quotes

“Up until recently, the PBoC appeared to be comfortable with CNY strength. However, the pace of the move in CNY, playing a degree of catch up with CNH, following the re-opening of Chinese markets after the Golden Week holidays, likely caused a degree of concern among officials. Consequently, the PBoC announced the lowering of the risk reserves ratio for FX forwards trading (from 20% previously to 0%). It will reduce the cost of hedging and encourage FX forward sales, suggesting increased near-term downside risks to CNY as well as more CNY volatility.”

“We see the PBoC move as a means to slow, but not stop the strength in China’s currency. We do not expect it to have a significant impact on other Asian currencies given the declining sensitivity of Asian FX with CNY.” 

“We think China still wants a stable to firm currency as a means to attract inflows and maintain domestic confidence. Economic data has strengthened and China’s economy is quickly getting back on its feet. Taken together, with an attractive yield differential and likely broad USD weakness post US elections, it implies that CNY weakness will be limited and short-lived unless the USD can get back on its feet, something that we think is unlikely in the months ahead.”