Category Archives: Asia FX

Chinese Renminbi – Squaring the circle

China’s exchange rate policy is one of many significant uncertainties or “known-unknowns” for 2017 (as it arguably was in 2016 and prior years).

The market’s focus is still very much on the rise in USD-CNY but Chinese policy-makers are keen to emphasise the importance of the Renminbi’s performance against a basket of currencies – the CNY Nominal Effective Exchange Rate (NEER). This comes as no surprise.

The monthly pace of CNY NEER appreciation or depreciation has rarely exceeded 3% in the past seven years, suggesting that policy-makers have sought to control the Renminbi’s rate of change.

Large (and well documented) capital outflows from China have been the main source of Renminbi pressure but China’s current account surplus-to-GDP ratio has also edged lower to around 2.5% due to a rising deficit in the services balance. This perhaps dents the argument that the Renminbi is still materially undervalued.

Moreover, despite the Renminbi’s gain in competitiveness in the past year, China’s trade surplus has somewhat counter-intuitively shrunk, not increased. This may be due to price effects outweighing demand-effects (for exports) and still strong credit-fuelled Chinese imports.

In response to quarterly capital outflows of between $100bn and $200bn since late 2015, the PBoC intervened in the FX market to the tune of about $280bn in January-November.

This strong commitment likely reflects the perceived economic and geopolitical benefits of limiting the Renminbi’s depreciation.

Near-term, I think the PBoC may continue to see some value in a broadly stable Renminbi or only very modest CNY NEER depreciation. If capital outflows re-accelerate this would likely require the introduction of further capital controls and aggressive FX intervention. This is certainly an option in the short-run.

If capital outflows stabilise or recede, the PBoC may be able to slow or even stop FX intervention. This is not a totally unfeasible scenario if global yields stabilise and a slightly stronger CNY attracts capital back into China or if capital controls take greater effect.

In the more unlikely scenario whereby China experiences capital inflows, which last happened in Q1 2014, I would expect the PBoC to have limited appetite for rapid and/or sustained Renminbi appreciation and instead use this opportunity to rebuild FX reserves.

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Asian currencies sticking to script

Despite the volatility in financial markets, Non-Japan Asia (NJA) currencies continue to behave broadly in line with historical patterns. Specifically, a basket of NJA currencies (excluding the renminbi) which was appreciating at about 3% month-on-month versus the USD dollar is now weakening in month-on-month terms, as largely predicted (see Figure 1). The pattern is similar when NJA currencies are measured against trading partner currencies. Read more

History points to Asian FX rally fizzling out

Non-Japan Asian (NJA) currencies have appreciated versus the US dollar and currencies of their main trading partners in October. But the historical pattern of monthly appreciation/depreciation suggests that this Asian currency rally may start losing steam in coming weeks, with currencies eventually weakening modestly versus the US dollar.

This historical pattern is partly due to the seasonality of current account flows, the ebb and flows of capital attracted/repelled by valuations and central banks’ management of their currencies. I see few reasons why it will be materially different this time round.

Inflows into Asia are unlikely to accelerate given lingering foreign investors’ concerns about regional and global economic growth, the start of the US Fed hiking cycle and country-specific vulnerabilities including sensitivity to commodity prices and elevated foreign debt.

Furthermore, while Asian central banks may not purposefully weaken their currencies, they may have the room and incentive to lean against further appreciation: overall, Asia inflation is low and falling, exports are weak and FX reserves have fallen in the past six months.
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Should China consider renminbi revaluation?

The causes behind the current meltdown in global equities, commodity prices and EM currencies are complex, inter-connected and at times self-reinforcing. But at the heart of the problem lies the inability of policy-makers from Washington to Beijing to engineer a more robust path for economic growth in which the private sector can believe in. This problem, which is largely structural in my view, has been compounded by cyclical challenges including stretched positioning in riskier assets and historically weak equities in August, as well as country-specific concerns in Malaysia, Brazil and Russia to name but three. Read more