Credit Suisse CNY stability before the storm

20 August,, Vilnius – Returning back to the lowering of China’s fixing, the market seems to be in a mood of CNY stability. However, the Credit Suisse CNY report argues that the storm is yet to come, by providing facts and findings.

Last week’s CNY devaluation traces remain at the Emerging Markets’ atmosphere, despite having the Chinese authorities initializing an exceptional scope of stability in the USDCNY currency pair (see exhibits 4 and 5 below).

However, the findings might reflects that China will resume the deprecation process soon, Suisse projects, and in line with the view the major bank foresees USDCNY to appreciate to 6.60 in 3m and 6.80 in 12m time.

The storm is still to come?

Credit Suisse comprehends the current Chinese authorities’ strict USDCNY control as aim for two objectives. “One is to try to dispel market concern that the government is embarking on a large devaluation of 10% or more. Another is to remind markets that the authorities can control the currency when they want to,” CS clarifies.

Following the USDCNY restriction to trade in an approximate range of 3 pips during last Friday and Monday, the central bank has been amending the fix bounding the trading in a range from 3 to 6.5 pips. So far the PBOC has allowed onshore spot to be traded above the restriction, yet the central bank again intervened to push trading lower to 6.3942 pips into the yesterday’s close.

We expect the PBOC to gradually rebuild volatility into the spot market over the next few weeks. Summarizing what we wrote about this last week, China’s economy is cyclically weak, nominal exports are under downward pressure, and we expect the PBOC to ease monetary policy further even as the US Fed tightens, Credit Suisse finished.

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