Yuan To Take Clues From The PBOC, Key Data

Fundamental Forecast for the Yuan: Neutral

• China’s Market News: The PBOC Tightens Liquidity through MLF Rate Hikes
• Asian Stocks Find Going Tough On China PMI, PBOC Rate Rise

The offshore Yuan strengthened to 6.7919 against the U.S. Dollar as of 12pm EST on Friday, the strongest level in two weeks. At the same time, the offshore Yuan remained stronger than the onshore Yuan, with a spread of more than 700 pips. The offshore rate also traded about 600 pips stronger than the Yuan fix set on Friday, when the PBOC resumed issuing the guided level after a week-long holiday for the Lunar New Year. Looking forward, a heavy Chinese calendar as well as China Central Bank’s moves could be major drivers to Yuan rates.

Amid an unclear outlook of Fed’s rate hikes, Dollar/Yuan rates could look for more clues from China’s side. The PBOC introduced additional tightening measures on liquidity on Friday, indicating a fully shifted tone on credit. The regulator lifted 7-day reverse repos rate by +10 basis points to 2.35% after kept the rate at 2.25% for 15 months. 14-day and 28-day reverse repos rates were increased by +10 basis points each as well, to 2.50% and 2.65% respectively. Also, the Central Bank raised rates of Standing Lending Facility (SLF) by +35 basis points for overnight borrowing and +10 basis points for both 7-day and 1-month. China’s Market News: The PBOC Tightens Liquidity through MLF Rate Hikes. Both SLF and MLF are loans targeted at Chinese policy banks and national commercial banks.

“China’s monetary policy has been set to be ‘prudent’ since 2011; however, during some of the periods, it was actually prudent and slightly loose”, stated by the PBOC’s Assistant Governor Zhang Xiaohui in an article published two days ago. As a result, China’s monetary policy needs to return to “prudent and neutral in 2017”, according to her. Interest rate hikes mentioned above are measures designated to achieve this target. Over the following periods, the regulator will focus on curbing excessive credit and high leverage, as well as fixing the transmission mechanism of monetary policy.