Fundamental Forecast for the Yuan:Neutral
- USD/CNH: A Changed Story in Jan 2017 vs 2016
- China’s Market News: China Restricts FX Purchases, Hikes Steel Mills’ Costs
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The Chinese Yuan was on a roller-coaster ride this week: the offshore CNH gained over 1% against the U.S. Dollar on both Wednesday and Thursday, and then lost -0.6% as of 11:00am EST on Friday. The offshore Yuan also traded higher than the onshore Yuan, which was uncommon. In Hong Kong, the largest offshore market, Yuan’s overnight funding cost soared to 38.3% on Thursday and hit 61.3% on Friday, the highest level in nearly a year; this is also far higher than the average daily rate of 2.86% in 2016. If Yuan’s funding costs remain elevated and above its normal levels, it will make it more expensive for traders to short the Yuan, providing support for the offshore pair. However, this abnormal condition will not last forever; it is important to look into central banks’ policies in the effort to find the trend for the Dollar/Yuan pairs over the following periods.
China’s Central Bank released monetary policy and regulation targets for 2017 on January 6th after the two-day annual meeting. In terms of monetary policy, the PBOC states that it will be “prudent and neutralâ€, revised from “prudent†in 2015 to 2016. Also, the regulator has changed the liquidity target from “keeping liquidity reasonable ample†in 2015 to 2016 to “maintaining liquidity basically stable†in 2017. These two revisions indicate tighter monetary policy in 2017, which further reduces the odds of PBOC cutting benchmark rates. For the Chinese Yuan, the regulator will keep two targets stated in 2016: promoting a market-driven exchange rate regime and maintaining Yuan basically stable; it adds one more for 2017 – to actively guide and stabilize market expectations. This means that the PBOC may send out guidance for yuan rates in 2017, which traders will want to keep a close eye on.
