Further modest USD/CNY depreciation likely

Two months since the shock devaluation of the CNY and the PBoC intentions regarding the exchange rate are becoming clearer. For now, policy makers seem to favour stability rather than rapid depreciation. 

"The recent narrowing of the gap between offshore and onshore CNY over the past month suggests relative calm in the CNY versus the USD in the next couple of months", says Lloyds Bank. 

Longer-term policy intentions could be made even clearer when the government meets later this month to discuss its next five-year plan. 

Nevertheless, recent economic data, not least the Q3 GDP release, point to further stimulus being needed if China is to smoothly navigate towards a more services-oriented economy. 

Further cuts to both policy rates and the required reserve ratio (RRR) are expected. Therefore, further modest depreciation in the exchange rate against the USD cannot be ruled out", added Lloyds bank. 

However, the timing is likely to come after any Fed policy tightening, as the PBoC weighs up the currency impact on other key Asian trading partners.