PBoC attempts of stabilizing CNY – USD/CNY hedging perspectives

We reckon that the USDCNY exchange rate determination will indeed mirror an increasing reference to the NEER currency basket even if the PBoC has not explicitly committed to this.

The PBoC needs to guide public opinion to focus more on the CNY effective exchange rate against a basket of currencies rather than the bilateral USDCNY rate to assess the likely direction of the currency.

The Chinese central bank has reiterated that "it will maintain the CNY exchange rate basically stable at an appropriate and equilibrium level against a currency basket" on 14 December.

However, recent USDCNY movements appear to suggest some (trend) depreciation in the CNY NEER, in view of the previous strong NEER appreciation since mid-2014 (+15%), continued weakening growth, and persistent deflation risks.

On the external front, we also forecast USD/CNY weaker to keep pushing USD/INR higher, the INR may hang around 66 trajectories to control further its depreciation.

Hence, it is recommended to buy 3M USD/CNY forwards of march expiries.