FX Watch
Group Economics Macro & Financial Markets Research
15 December 2015
CNY index implies weaker CNY? Roy Teo Senior FX Strategist Tel: +65 6597 8616 roy.teo@sg.abnamro.com Arjen van Dijkhuizen Senior Economist
China has introduced a new currency index…
…to better capture shifts in competitiveness
CNY index has declined by 1.5% this month
We do not think that the weak CNY a one way bet…
…and we see a gradual yuan depreciation policy
Tel: +31 20 628 8052 arjen.van.dijkhuizen @nl.abnamro.com
New currency index – a better gauge for external competitiveness On 11 December, the China Foreign Exchange Trade System (CFETS) – a sub-institution of the People’s Bank of China (PBoC) - published a Chinese yuan (CNY) index to better capture the competitiveness of China’s goods and services compared to just using the bilateral exchange rate of the yuan against the US dollar. The new index give higher weights to key trading partners, which is called a narrow index, compared to the Bank of International Settlement (BIS) currency basket.
CNY index weights Weights
0.30 0.25 0.20 0.15 0.10 0.05
CFETS
NZD
CHF
CAD
THB
SGD
GBP
RUB
MYR
AUD
HKD
JPY
EUR
USD
0.00
BIS
Source: CFETS, BIS
The currency weight is calculated by international trade weight with adjustments of reexport trade factors. All this signals a shift away in China’s exchange rate policy from a de facto crawling peg versus the US dollar to a system in which the CNY is managed against a currency basket. We think that is in itself a logical step, as a peg to the US dollar does
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FX Watch – CNY index implies weaker CNY?– 15 December 2015
not really look optimal for several reasons. First, it may hurt Chinese exports in times when the US dollar is exceptionally strong, as we have seen this year. Second, with the CNY now included in the SDR basket, it does not make sense for the yuan to be exclusively pegged to another component of that same basket. CNY index has declined since the start of December According to the new CNY index, the CNY has appreciated by almost 3% from 31 December 2014 to 30 November 2015 against other currencies in the basket. 30 November is the date of the IMF’s formal approval of the inclusion of the CNY in the SDR basket. Since that day, the CNY index has declined by about 1%, sparking market fears that the People’s Bank of China (PBoC) is seeking a weaker yuan to inflate and support the economy.
CNY Index Index level
106 105 104 103 102 101 100 99 Dec-14
Feb-15
Apr-15
Jun-15
Aug-15
Oct-15
CNY Index Source: CFETS, ABN AMRO
Weak CNY a one way bet? As highlighted in our EM FX Weekly – PBoC seeking a weaker yuan? Published on 10 December, the large divergence in the offshore and onshore yuan is temporary and likely to narrow in the coming weeks. The bearish sentiment in the yuan spot and forwards market is near extreme levels, reflecting market herd behaviour.
CNH divergence with CNY ; 1 week CNH Hibor fixing CNH-CNY divergence
Reverse scale %
0.05
2
0.00
4
-0.05
6
-0.10
8
-0.15 Aug-15
10 Sep-15
CNH divergence with CNY (lhs) Source: Bloomberg
Oct-15
Dec-15
1wk CNH Hibor fixing (rhs)
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FX Watch – CNY index implies weaker CNY?– 15 December 2015
Though the PBoC has signalled that they will allow the exchange rate to be more market determined, we expect the central bank to punish speculators betting that the depreciation of the yuan is a one sided bet. Indeed, we suspect that the PBoC has resumed its intervention activities to defend weakness in the offshore yuan resulting in offshore yields spiking higher. In addition, the PBoC has fixed the USD/CNY daily rate lower by almost 60 pips on 14 December compared to 11 December closing rate. In our view, this is to signal that the new CNY index regime does not mean that the central bank is seeking to aggressively devalue the yuan against the US dollar. Gradual yuan depreciation policy Given our view that inflation and export growth in China will gradually improve in 2016 as the global economy firms and commodity price stabilise, we do not think that the authorities will steer towards a sharp depreciation. Moreover, a large depreciation in the yuan is likely to result in an acceleration of capital outflows and negative spill over effects on other currencies. China’s large foreign exchange reserves and current account surplus should continue to support the yuan. We expect the CNY to decline to around 6.55 against the US dollar by the end of 2016, which less pessimistic than what the forward market (end 2016 6.75) and analyst survey (end 2016 6.60). Based on our 2016 forecasts for currencies in the CNY index, the CNY index is expected to appreciate next year by approximately 4% from current levels.
1 year USD/CNH and 1 year USD/CNY NDF Level
6.8 6.7 6.6 6.5 6.4 6.3 6.2 Jan-15
Mar-15
May-15
1 year USD/CNH outright Source: Bloomberg
Jul-15
Sep-15
Nov-15
1 year USD/CNY NDF outright
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FX Watch – CNY index implies weaker CNY?– 15 December 2015
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