China: Comfortable Keeping USD/CNY Relatively Stable – Deutsche Bank

China: Comfortable Keeping USD/CNY Relatively Stable – Deutsche Bank

21 April 2016, 14:57
Roberto Jacobs
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China: Comfortable Keeping USD/CNY Relatively Stable – Deutsche Bank

Research Team at Deutsche Bank, suggests that as China continues to liberalize its capital account, the authorities are comfortable keeping the USD/CNY relatively stable for the time being.

Key Quotes

“So as to (1) restore stability in order to calm market nerves about CNY depreciation, and (2) discourage further capital outflows. Given the new-found stability, China is unlikely to introduce more direct measures to manage flows, including a Tobin tax.

In the medium term, however, the authorities would still allow the CNY to weaken during a period of USD strength, albeit at a more gradual depreciation pace. This is to ensure that the RMB is not overvalued against the basket, and, given that corporates are a more appropriate hedge than before, some RMB flexibility can be permitted. The timing of this is tricky, since the RMB is very much a policy driven currency.

Most people with whom we have spoken expect the USD/CNY to remain relatively stable in 2Q and depreciation to resume only in 2H, when the USD outlook starts to turn, as the Fed resumes rate hikes.”


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