REGION:

RMB Bi-weekly - RMB stabilizes into year end

 |  December 14, 2017

 Overview
• USD-RMB stayed range-bound as authorities are keen to stabilize the currency for the remainder of the year.
• The People’s Bank of China (PBOC) raised the Reverse Repo and Medium-Term Lending Facility Rates in response to the Fed’s rate hike.
• China signaled contingency plans to deal with the impact of US tax reform.


USD-RMB
The RMB has been confined within 6.5900-6.6350 since the beginning of December with little impetus to shake the pair outside of the current range. While the CNH has gained 5.5 percent year-to-date against the greenback, authorities appeared keen to maintain a stable exchange rate after experiencing a volatile start in 2017, when the USDCNH plummeted 3 percent in the first week of trading.

Even though the PBOC responded to the Fed’s rate hike on December 13th, it is unlikely that they would want to maintain the pace of tightening with their U.S. counterpart.

There are three main reasons for this.
1. A stable exchange rate allows the PBOC to be less aggressive on raising rates to support the Yuan.

2. Inflation has been tamed with consumer and producer price inflation decelerating in November. China’s CPI is hovering sub 2 percent and is well within the government’s goal of 3 percent for the year.

3. China’s bond market did the majority of heavy lifting on rates already, as the 10 year government benchmark bond yield climbed 84 basis points from 3.06 to 3.90 percent over the past twelve months.

With the Fed projecting three rate hikes in 2018 and the PBOC expecting to trail behind in the rate tightening cycle, interest rate differential should narrow in favor of the U.S. and put more pressure on the Yuan to weaken.


PBOC raised rates
Following the Fed’s 25 basis hike to 1.50 percent in the Fed funds rate on Dec 13th, the PBOC quickly responded by lifting their 7 and 28 day reverse repo rates and the one year medium term lending facility rate by 5 basis points to 2.50, 2.80 and 3.25 percent respectively. Even though the timing of the move may have come as a surprise, the magnitude of the hike was only half compared to February and March when the PBOC raised 10 basis points on each occasion.

Nonetheless, it has important implications. It signals that the PBOC is cautious and has given careful considerations to year end funding demand and the Fed tightening. Firmer rates would assists in their efforts to deleverage the financial sector and reign in the rapid credit expansion. However, if the government does not want to jeopardize economic growth, it still has other measures such as macro prudential framework and regulations that they could introduce instead of relying on monetary tightening to achieve their goals.


China’s contingency plan to deal with US tax reform
The Chinese government is preparing contingency plans to deal with the impact of the expected US tax reform and monetary tightening by the Fed to its economy. Based on the Fed’s dot plot there are still 6-7 rate hikes to go over the next 3 years. The combination of an overhaul of the US tax system and higher interest rates, should make the U.S. more competitive and an attractive destination for global investors.

To circumvent another capital outflow scenario in China, the PBOC has formulated plans that includes: raising interest rates, increasing the levels of FX intervention to prop up the Yuan and introducing capital controls. This could provide another opportunity for the Chinese authorities to progress on domestic reforms.



Source: Reuters, Bloomberg

The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.


Foreign exchange transactions can be highly risky, and losses may occur in short periods of time if there is an adverse movement of exchange rates. Exchange rates can be highly volatile and are impacted by numerous economic, political and social factors, as well as supply and demand and governmental intervention, control and adjustments. Investments in financial instruments carry significant risk, including the possible loss of the principal amount invested. Before entering any foreign exchange transaction, you should obtain advice from your own tax, financial, legal and other advisors, and only make investment decisions on the basis of your own objectives, experience and resources.

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The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.

Foreign exchange transactions can be highly risky, and losses may occur in short periods of time if there is an adverse movement of exchange rates. Exchange rates can be highly volatile and are impacted by numerous economic, political and social factors, as well as supply and demand and governmental intervention, control and adjustments. Investments in financial instruments carry significant risk, including the possible loss of the principal amount invested. Before entering any foreign exchange transaction, you should obtain advice from your own tax, financial, legal and other advisors, and only make investment decisions on the basis of your own objectives, experience and resources.

About the Author

Market professional with over 20 years experience in FX and rates sales, trading and structuring. Provided coverage to clients in various business segments from corporates, Hedge funds, real estate investors and regional banks.
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