Regarding the market impact on different Reminbi asset classes, generally all should retrace toward the levels before the change, however, they will not fully return totheir previous levels. The implied volatilities, risk reversals and CNH forward outrights moved similarly, all coming off from the peak occurring on 12 August.
They are expected to remain elevated at the current level. CNH forward points have returned to the levels before the change of fixing regime happened. The short tenor (less than 1Y) has even surpassed the previous levels. The driver behind this is that banks are re-hedging their structured products, which is mainly accomplished by buying 3-month USD/CNY NDFs and USD/CNH forwards and selling 12-month tenors for both.
"Given the volume is fairly large, the current trend of supported short end and depressed long end will continue. CNH CCS rates followed the CNH forward points closely and, along with the large CNY/ CNH spread, the arbitrage flows tend to tighten the offshore liquidity and keep the short-term rates at high levels", says Credit Agricole.
Finally, there are concerns over how this change in fixing regime will impact the CNY joining the SDR basket. According to the IMF, it welcomes the new CNY fixing mechanism and believes that it has no direct impact on its SDR status.
"Globally, policymakers are broadly accepting CNY depreciation. As mentioned above, the new fixing methodology makes the CNY fixing a more valid and appropriate reference rate for spot, which modestly improves the odds of CNY's inclusion in the SDR basket as of 1 October 2016. We see a 70% chance of a positive IMF decision already this year", added Credit Agricole.
