Soon after the Chinese central bank fixed its currency, USD/CNY progressively higher from last consecutive week or so following the 11 August announcement, for cumulative weakness of 4.6%. This is a step toward realigning the exchange rate with fundamentals. Taking into account this week's weakness in CNY, we estimate that another CNY is still 3-4% overvalued against the USD, which gives some context to the extent of any further potential weakness.
PBoC has stated that there is no basis for persistent depreciation in the CNY and on 13 August announced that the (exchange rate) adjustment is basically over. Additionally, China's policy priority is to rebalance GDP growth from investment and exports to consumption, and a marked devaluation in RMB would be inconsistent with that goal.
PBoC also reportedly intervened to stem the pace of RMB depreciation, which we take as a strong signal. Therefore, we do not see this week's pace of depreciation in RMB continuing, although we do forecast further RMB weakness to 6.56 by end-2015 and 6.95 by end- 2016.
