USD/CNY likely to weaken further

The CNY is softening continuously after the August devaluation. However, the currency is still stronger, therefore, the the PBoC is expected to devalue the currency further. It is observed that the central bank is losing its hold on the markets. 

"To sum up, more CNY weakening could be in store, but the pace is likely to be gradual. USD/CNY will increasingly be determined by the markets, which makes the weakening a depreciation rather than a devaluation. We still expect the PBoC will intervene to prevent the pace of weakening to become excessive and the CNH-CNY spread to widen too much", argues Nordea Bank.

The PBoC announced a new currency index last Friday, referred to CFETS RMB Index. China has already de-pegged the CNY from the USD in 2005, though in practice, it was following closely the movements of the USD. Analysts see the new trade-weighted exchange rate index as a further de-peg of the CNY from the USD.

The central bank is likely to change its exchange rate regime once again and set the fixing against a basket of currencies instead of against the USD, added Nordea Bank.