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The PBoC announced a slew of relaxation to enhance CNH liquidity, partly for the preparation for potential CNH liquidity demand upon MSCI inclusion, points out Frances Cheung, Research Analyst at Westpac.

Key Quotes

“The changes should greatly relieve liquidity pressure on the offshore CNH market, and reduce the upside risk to CNH forward points. In particular, offshore investors under Stock Connect are allowed access to onshore FX market for funds and FX hedges – this should mean the RMB funds for northbound flows can be sourced from onshore CNY, not necessarily withdrawing liquidity from CNH.”

“That said, on the other hand, there is a lack of trigger for much downside to CNH DF points, as we would imagine that the currency mix when offshore investors remit funds out from onshore China should be required to be similar to the currency mix when they brought in. If that is the case, we expect CNH points to stay around current levels, before we hear further regulatory changes.”

“The CNY was fixed weaker than basket move on some days, and stronger on others, highlighting the authorities’ desire for two-way fluctuations. Forex settlement data suggest a mild inflow, but USD/CNY faces some upside pressure premised on a strong dollar with the next resistance at 6.4355.”