20180806-大华银行-FX_Strategy__Renminbi_Déjà_vu_7页_460kb

FX Strategy Summary: Renminbi Déjà vu

Core Content

This document provides an analysis of the recent reintroduction of the 20% reserve requirement for CNY forward sales by the People's Bank of China (PBoC) and State Administration of Foreign Exchange (SAFE), and its implications on the Chinese currency. It also outlines the broader outlook for the CNY and USD/CNH exchange rate, highlighting the technical and fundamental factors influencing the market.

Main Points

1. Reintroduction of the 20% Reserve Requirement

• The PBoC and SAFE reintroduced the 20% reserve requirement on 6 August 2018, effective immediately.
• This measure is an additional FX margin cost for short CNY forward positions, distinct from the RRR (Reserve Requirement Ratio) for banks.
• The reintroduction was a response to the intensifying weakness of the CNY, with USD/CNY and USD/CNH rising to their highest levels in recent weeks.
• The move is not capital control, but a macro-prudential policy tool to stabilize financial markets and prevent risks.

2. Recent CNY Weakness

• The CNY has weakened significantly over the past two weeks, with USD/CNY and USD/CNH reaching 6.8925 and 6.9120, respectively.
• The implied volatility of USD/CNY has risen from 4% in June to 6.50%, indicating increased market uncertainty and expectations of further movement.
• The CFETS RMB Index has fallen from ~98 in June to ~92.95, showing a ~5% trade-weighted decline against China's largest 24 trading partners.

3. Historical Context

• The 20% reserve requirement was previously in place from October 2015 to September 2017.
• During that period, the CNY weakened from 6.20 to 6.96, despite the policy, due to capital outflows and trade tensions.
• The removal of the policy in September 2017 coincided with a temporary stabilization of the CNY around 6.70.

4. Key Negative Drivers for CNY Weakness

• US Federal Reserve rate hikes: The FED is expected to raise rates 3 times in 2018, including September and December, which puts downward pressure on the CNY.
• US-China trade conflict: Tensions have escalated, with the US proposing 25% tariffs on $200bn of Chinese imports, and China retaliating with $60bn in tariffs on US goods, including LNG.
• Weakening Chinese yield curve: The 1M interbank repo rate has dropped to 2.45%, and the 10-year CGB yield has fallen to 3.45%, reflecting monetary easing and economic concerns.
• Trade-weighted basket weakness: The CNY is not only weakening against the USD, but also on a trade-weighted basis, indicating broader economic pressures.

Key Information

• USD/CNY and USD/CNH fell from 6.90 to 6.83–6.84 after the reintroduction of the 20% reserve requirement.
• Short-term technical outlook for USD/CNH suggests a potential short-term top, with immediate support at 6.8160, followed by 6.7750 and a major support zone at 6.7350/00.
• The CNY weakening bias remains intact, and the point forecasts for USD/CNY are unchanged at 6.95 by end-2018 and 7.10 by mid-2019.
• The binary risk of the USD/CNY outlook depends on the evolution of US-China trade relations.

CNY Outlook

• Short-term stability is expected, with the CNY likely to stabilize around 6.80 for the next few weeks.
• However, the weakening bias is still present, and further depreciation is anticipated as the negative drivers intensify.
• The PBoC's comment on maintaining a stable and reasonable level for the CNY is widely discounted by investors due to the ongoing trade-weighted weakness.

Recent Publications

• US-China Trade Tensions: China retaliates with tariffs on additional US goods.
• Malaysia: June export growth declines to 7.6%.
• UK BoE: Raises policy rate to 0.75%.
• India: Economy deepens into the business cycle as RBI follows US tightening path.
• US FOMC: Signals a 4th rate hike for 2018.
• China: Implements more counter-cyclical measures but maintains monetary and fiscal stance.
• Indonesia: Inflation rises in July.
• Taiwan: Economic activities expected to soften in 2H.
• Japan BOJ: Tweaks forward guidance and maintains yield flexibility.

Disclaimer

• This document is for informational purposes only.
• It is not an offer, recommendation, or advice to buy or sell any investment products.
• Opinions and projections are subject to change and not guaranteed.
• UOB Group may have positions or interests in the securities discussed and may have issued other reports with different views.