While Goldman is quickly down-playing the decision by the PBOC to double the size of the daily trading bands for USDCNY to +/2.0% as a risk-off event (just as it was in 2012 – but blame that on Greece as cause rather than symptom), BofA is a little less sanguine about the move noting a more volatile CNY/USD without trend appreciation will deter hot money inflow and perhaps will result in some unwinding of previous inflow. With 1-month volatility spiking to over 4% (its highest in over 2 years), the move is sure to remove some carry traders as risk-rewards break down on their leveraged positions.
Implied volatility is dramatically higher (i.e. the market is pricing in expectations of more volatility going forward) which reduces the risk-reward characteristics of the carry trade and thus removes many players (or at best merely reduces their leverage)…
Â
Via BofAML,
The PBoC widens CNY/USD daily trading band to +/-2.0%
The PBoC on 15 March announced to widen the yuan-dollar (CNY/USD) daily trading band to +/-2.0% from +/-1.0%, effective from 17 March. The previous band widened took effect on 16 April 2012 when the band was widened from +/-0.5% to +/-1.0%.
Â
This should not be a big surprise to the markets as the PBoC has made it clear recently that it would widen the band this year. Perhaps the timing of this band widening is slightly ahead of what markets had expected.
What’s the most important message?Â
The band widening strengthens the PBoC’s signal that the one-way bet on CNY gain is over, and we should expect more CNY/USD volatility going forward. In the PBOC’s own words, two-way yuan fluctuation will become the norm. In the past month we have observed falling interbank rates and falling CNY/USD in China. We believe these moves were engineered and coordinated by the PBoC to solve the dilemma (rising rates, rising hot money inflow and rising CNY) it was facing in 2013.Â
