People's Bank of China a 'beacon of stability', says analyst

The recent PBoC fixes may have played a role in stalling the powerful bid for USD-AXJ amid liquidation dynamics in emerging markets.

According to Standard Chartered, the CNY has gained 0.45% in the past week, and the annual pace of appreciation since the mid-June 2010 de-peg stands at a healthy 5.74%.

Here's more from StanChart:

The US political debate on whether the Chinese yuan (CNY) is significantly undervalued, and whether this requires a US policy response, is set to spring back to life this week. Legislators are set to vote on a Senate bill that would require the US Commerce Department to impose countervailing duties on imports from countries dubbed as “currency manipulators”.

A similar bill was passed by the House in 2010, and President Obama may be reluctant, or unable, to veto a bill with broad congressional support. This development is a timely reminder that while the FX markets may buy US dollars on risk aversion amid lacklustre US economic data, persistently weak US labour market out-turns are stoking the case for CNY adjustment, not undermining it.

In the global market turmoil, the People’s Bank of China (PBoC) has played a steady hand in setting its recent daily USD-CNY fixes – acting as a beacon of stability for the regional FX markets. Rather than hinting at a re-peg or responding abruptly to broader USD swings, the USD fixes have been on a steady downward path. The CNY has gained 0.45% in the past week, and the annual pace of appreciation since the mid-June 2010 de-peg stands at a healthy 5.74%.

The recent PBoC fixes may have played a role in stalling the powerful bid for USD-AXJ amid liquidation dynamics in emerging markets. USD-CNY ends Q3 within a whisker of our forecast (6.39), and we see further steady gains versus the USD in Q4 (our year-end forecast stands at 6.31). This CNY move not only meets external demands for FX adjustment, but also has domestic support as there are concerns about China’s persistent build-up of official FX reserves.

The path of the PBoC fixes has had a rather limited role in driving broader CNY pricing. The offshore CNH discount to the onshore CNY has now stretched to 1.8% (leaving CNH weaker than it was at the start of August), while the 1Y USD-CNY NDF has climbed to 0.47% above the onshore spot rate. Given our bullish call on USDAXJ into year-end, the pattern of lower fixes but choppy trading in the offshore market and USD-CNY forwards looks set to persist throughout Q4.

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