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RMB Bi-weekly - RMB Strength: Breaking Out of Recent Range

 |  April 02, 2018

Overview

  • USDCNH broke out of recent range.  This time around it was the offshore CNH that led the move to a low of 6.2580.  RMB is back to the level last seen before the revaluation in 2015. 
  • Headlines on trade wars, bond index inclusion and trading of CNY denominated oil futures have all contributed to the spike in the currency. 
  • The People’s Bank of China (PBoC) new leadership team signals continuation of structural reforms and Xi’s influence.


RMB - What's in play?

After breaking the recent range of 6.30 during London trading hours, the pair went through the next line of resistance at 6.25 the next day.   

Many cited the inclusion of the Bloomberg Barclays Global Aggregate Index to be the trigger for the spike in CNY.  Local currency Chinese bonds will be the fourth-largest component in the Global Aggregate Index when fully accounted for, however, the program will have a phase in period of 20 months starting April 2019.  With such a long horizon, it’s hard to pin point this as the single driver for the move yesterday.  Seems like the pair is still haunted by the prospect of a full blown trade war between the two biggest economies of the world.  

President Trump ordered a tariff on $50 billion worth of goods from China while, US Treasury Secretary Mnuchin says he is optimistic that the US will reach an agreement with China that will forestall the need to impose the tariff that President Trump ordered.  What does this sound like to you?  Playing a good cop, bad cop routine to advance in a negotiation?  If true, we should see EM/risky asset rebounding on any progress made with China and NAFTA re-negotiation. 

The headline about CNY denominated oil future is also positive but may have gone below the radar amidst all the attention on the trade war.  China’s long-anticipated crude oil futures have started trading on the Shanghai International Energy Exchange. The yuan denominated crude oil contracts are the first futures listed on the Chinese mainland.  Pricing oil in CNY may boost the currency's value and divert trading away from the dollar in the long run. 


PBoC’s New Leadership

Guo Shuqing is appointed as the Communist Party Secretary of PBoC.  Shuqing is seen as an aggressive reformer and he is also the Chairman and Party Secretary of the newly established China Banking and Insurance Regulatory Commission (CBIRC).  In a political pecking order, as the Party Secretary, this places Guo above Yi Gang, the newly appointed PBoC Governor.  But as Vice Governor, Guo is a step below Yi.  

Guo’s appointment seems to be a special arrangement as PBoC Governor and Party Secretary were appointed to the same person for the past 15 years.  What does the split leadership at PBoC mean?  Guo’s unique position will allow him to coordinate policy making between PBoC CBIRC and advance Xi’s agenda in advancing financial reforms and contain systematic financial risks.   Splitting the role seems to signal that the Party and the economy have become more interconnected.  Unlike other central banks, PBoC’s decision making is subject to influence of the Communist Party and the government.  


Flows

Corporate accounts have been using this dip in USD/CNH as a good buying opportunity.  Buying interests emerge around 6.26 level.  Demand from the corporate side could provide support here.  From our franchise, we’ve observed corporate seller pulling back and unwilling to pull the trigger sub 6.30 level. 

USD selling interests is more prominent in offshore market while onshore market has been well supported on the back of domestic month end outflows.  At one point, onshore/offshore spread widened to 130 pips.  

In the short-term, the market might have already seen the low in USDCNY.  Expect new developments from trade negotiation to dominate the price movements. 


Source: Reuters, Bloomberg

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About the Author

Lisa is part of the Global Financial Services Group based in Santa Clara, California . Her primary focus is in advising Asia based PE/VC and corporate clients in currency risk management.

Lisa has 10 years of experience in the FX and derivative markets and has lived and worked in Hong Kong and Singapore. Prior to joining SVB, she worked at Goldman Sachs and Barclays Capital in various sales capacities covering a range of institutional accounts, from corporate clients, to PE firms as well as regional private banks. Her experience includes treasury risk management, structured investment products, hedging strategies in cross-border acquisitions, and structured financing solutions. Lisa started her career at KPMG San Francisco in the Assurance Practice. She holds a bachelor’s degree in Economics from University of California, Berkeley.
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