PBoC likely to hike reverse repo rates again in December - Scotiabank

The People’s Bank of China skipped open market operations for the third consecutive session on Tuesday, absorbing a total net CNY 300 billion of funds from the banking system in the past three sessions.

However, the PBoC is expected to conduct net cash injections to the money market in mid-December before draining liquidity again near the year end to maintain onshore liquidity conditions at a proper level, noted Scotiabank in a research report.

The requirement for the central bank to defend the yuan through a rise in money market rates are believed to have lowered greatly. The yuan’s implied volatility has been falling recently consistent with continuously sliding risk reversal. With a resilient yuan and rising expectations of additional financial reforms, foreign investors are expected to add to their holdings in yuan-denominated financial assets including equities and bonds in the coming years, especially if taking into account the increased yield advantage of yuan-denominated bonds. But the PBoC is expected to hike its reverse repo and MLF rates again in December, stated Scotiabank.

“The yuan is expected to trade in a range of 6.50-6.70 in the weeks ahead”, added Scotiabank.

At 15:00 GMT the FxWirePro's Hourly Strength Index of Chinese Yuan was neutral at -19.125, while the FxWirePro's Hourly Strength Index of US Dollar was bullish at 88.5377. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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