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The major Asian currencies seem unchanged today, but significantly weaker in the medium-run, with CNY and KRW leading the way. USDCNY is again approaching 6.90, and the market expects that the PBoC could step into the market soon as the central bank signalled to maintain currency stability.
Well, in the Q2, monetary policy report released last Friday, the PBoC stated that the recent policies (including the required reserves for the forward trading) were timely and had effectively managed the market expectations.
In addition, the central bank said that it would roll out counter-cyclical measures when necessary. That said, a rapid CNY depreciation can be largely discounted for now.
The change is calibrated and does not reflect a sea- change in the PBoC’s management of FX policy. As much as the currency represents the first order policy tool to deal with heightened trade tensions, there is a fine line between lowering interest rates/easing liquidity conditions leading to a weaker currency and a rapidly depreciating currency triggering capital outflows and pressurizing liquidity tighter.
Indeed, in recognition of this fine line and of the need to break the bearish market sentiment, the PBoC, last Friday, imposed a 20pc reserve requirement levy on importers/corporates with FX liabilities buying forward USDs. The move implicitly raises the 12m hedging cost by roughly 60bps, without affecting domestic liquidity.
However, at roughly 1.0% of implied annual CNY depreciation, the total cost of FX hedging is still very low and offers only a limited deterrent in the way of a weaker CNY. Courtesy: JPM
Currency Strength Index: FxWirePro's hourly USD spot index has shown 64 (which is bullish), while CNY is flashing at 73 (bullish), while articulating at 14:01 GMT.
For more details on the index, please refer below weblink:
