Feeling the drag from China

The Chinese authorities' determination to prevent further CNY weakness has waned lately. FX intervention has apparently been scaled back, and the pace of CNY depreciation has accelerated since the start of December. With the CNY fixings more closely linked to the spot closing rate after the 11 August change in fixing mechanism, CNY fixings versus USD fell to 6.4358 last week, the lowest level since August 2011. In the offshore market, where the yuan flows more freely and foreign investors are more active, spot CNH has fallen even more. 

"We see policy aimed at limiting CNY REER appreciation, and the launch of the CFETS REER CNY index indicates the PBoC's focus on REER", says Barclays.

Meanwhile, some Asian currencies have also been dragged lower by the CNY move, with KRW the notable underperformer.The authorities' resistance to CNY depreciation after the 11 August devaluation as inconsistent with the country's weak economic outlook, monetary easing bias, and capital account liberalization plan. Last week's suspension of new applications for the RQDII scheme marks another attempt to slow resident curb outflows, which is in conflict with the liberalization agenda. A high risk of sustained capital outflows seen over the medium term for a few reasons. First, because of heightened FX policy uncertainty after the August devaluation, repayment of external borrowings by Chinese corporates could accelerate. Second, declining returns on domestic investments and rising credit risks could spur more resident outflows. 

"We maintain our forecast of USDCNY 6.80 by mid-2016, although we do not rule out authorities' stepping in to slow the CNY's drop if market speculation intensifies after the FOMC decision. We also maintain the long USDCNH and USDKRW trade recommendations", added Barclays.

A number of central banks are in focus, including the BoT, BI, BSP, and CBC (Wednesday for BoT, Thursday for the latter three). All of these banks are expected to keep policy rates on hold and adopt a wait-and-see mode in anticipation of the FOMC meeting. A slight rise is expected  in November CPI and WPI inflation prints in India, reflecting higher prices of certain food items and an adverse base effect (last: 5.0%), but exports are likely to remain under pressure.