Earlier Tuesday, the People’s Bank of China set the yuan central parity rate versus the dollar at CNY6.1610, the lowest yuan level since Sept. 10, 2013.
The renewed yuan weakness had spillover effects on dollar-yuan, both on-shore and off-shore, with market players preparing for additional weakness in sessions to come.
Dollar-yuan on-shore topped out around CNY6.2391 (Bloomberg), the weakest yuan level since late February 2013, and dollar-yuan off-shore saw a peak of CNH6.2392, a 14-month high.
Barclays strategists noted USDCNH was up nearly 4% since early January, “marking the largest CNH sell-off since the off-shore vehicle’s launch in 2010.”
The yuan weakness seen Tuesday went largely unnoticed, with the focus instead on the People’s Bank of China implementing the reserve requirement cut for rural commercial banks (see MNI mainwire at 7:12 am ET) that the State Council announced last week.
“While the RRR cut received the headlines, perhaps a more important stimulus development continues to be the weakening of the CNY, with USD/CNY reaching a 14-month high today,” said Bob Sinche, global strategist at Pierpont Securities.
“While the weakening of the CNY is only about 3% from the Jan. 14 high, the rebound is the most abrupt since the appreciation of the CNY began in 2005,” he noted.
In terms of Chinese investment flows, “Chinese banks bought RMB189.20bn in March (on behalf of their clients); Net of trade, banks bought RMB141.4bn ($22.83 billion), the seventh straight month of net FX purchases,” noted Elsa Lignos, strategist at RBC Capital Markets in a research note.
“This is a proxy for speculative capital inflows into China and suggests that the Chinese corporate sector continued to accumulate more CNY relative to that implied by their trade flows in the month (the March trade balance was a surplus of $7.71 billion),” she said.
RBCCM noted “the process of flushing out speculative long Yuan positions” appeared to still be “in its infancy,” Lignos said.
“We remain wary of further yuan depreciation and/or a sustained CNH discount to CNY,” she added.
In a recent note, CIBC strategists observed that the CNY and CNH were about 2.7% weaker on the year, offsetting the 3% yuan gains seen both on-shore and off-shore in 2013.
“We believe the drive to squeeze speculative long CNY positions from the domestic market has run its course and we now anticipate a period of stability,” they said.
“Picking how far USDCNY could reach during this anticipated period of stability will require monitoring of the balance of flow,” the strategists said.
CIBC maintained that the market may not have confidence in the Chinese economy until deep in the second quarter.
“Our view on the CNY is that this period of stability, that will stretch for as long as it takes for the data to show that though growth has moderated, it will remain underpinned by policy initiatives, though not of the form or magnitude seen post 2008,” the strategists said.
This month, CIBC re-introduced a trade recommendation to sell strength in USDCNY.
CIBC would sell USDCNY 12-month NDF at CNY6.30, with a downside target of CNY6.10 and at stop-loss at CNY6.36.
Win Thin, head of emerging market currency strategy at Brown Brothers Harriman, saw USDCNY trading in a CNY6.20-6.30 range in Q2.
As for when, and/or if, the PBOC will again allow the yuan to strengthen, “that’s to be determined,” he quipped.
The engineered yuan declines seen recently are less about helping Chinese exporters and more about trying to “flush out one-way bets in the yuan,” Thin said.
“They (the PBOC) don’t want to go back to something predictable like that,” he said, referring to the steady yuan gains seen in the past few years, up until recently.
Wednesday’s release of HSBC flash PMI data may again shift the focus from yuan currency fluctuations, Thin said. (The market looked for the headline flash index to rise to 48.3 in April versus 48.0 final in March).
“HSBC PMI has been below 50 for three straight months, while the official PMI has held above it (but just barely at 50.2 in February and 50.3 in March),” Thin said.
While the Chinese economy continues to slow, BBH did not look for any large-scale stimulus measures.
“Rather, a targeted approach (such as the recent cut in required reserves for some rural banks) is likely to be maintained,” Thin said.