USD/CNY: What’s next in store? - Nomura

Analysts at Nomura explain that China’s FX regime had exhibited a bias to hold the USD/RMB stable since the end of March but, more recently, it began forcefully appreciating RMB and Nomura is not certain when this tendency will revert to its previous stable RMB regime, but spot movements and fixings suggest there is room for this bias to persist.

Key Quotes

“If the objective of authorities is to bring some stability to CNY CFETS (the trade-weighted index) and strengthen CFETS back to certain levels, we would make a few observations:

1. Spot USD/CNY would need to fall to around 6.75 for CNY CFETS to move back to levels when Donald Trump won the US presidential election (9 November Asia time).

2. Spot USD/CNY would need to fall to around 6.69 for CNY CFETS to move back to 20 January 2017 levels (levels during President Trump’s inauguration).

3. Spot USD/CNY would need to fall to around 6.675 for CNY CFETS to move back to levels at the start of the year.

4. Spot USD/CNY would need to fall to around 6.15 for CNY CFETS to move back to 10 August 2015 levels (before the China one-off and FX regime shift).”

“Note that these estimates assume other currencies in the basket remain stable and these levels will change dynamically. Please note these are not our target or forecast levels.”

“If the recent RMB appreciation trend continues, we would also expect some local risks to increase. Specifically, PBoC data on onshore FX forward positions for local corporates show that they were last net long around USD104.2bn USD/CNY FX forwards. This FX forward position may not accurately reflect actual outstanding hedges, as we believe some FX hedging has taken place in the CNH market. That said, long USD/RMB FX hedges by corporates have been built up substantially (especially since August 2015), and we see a risk of these shifting given the sharp appreciation of RMB recently. We believe this could support the next leg on the downside in onshore USD/RMB.”