CNH: One-Off Devaluation Unlikely

   

      USDCNH spiked towards 6.70 yesterday before making a complete reversal within minutes. The sharp reversal seems to indicate the presence of the central bank. However, PBOC has clarified that it did not. This clarification shows 1) PBOC wants to communicate more 2) PBOC wants to show that they are less keen on FX intervention and they want to allow market forces to drive CNY.

      A period of limited dollar strength can provide a conducive environment for PBOC to release more yuan depreciation pressure within the year. We think yuan (CNY and CNH) are likely to be weaker but depreciation pace should be gradual.  A one-off depreciation is not desirable as it tends to spiral as seen last Aug and in Jan this year.

      How to show that yuan can be market-determined? Risk events ahead could be taken as opportunities to demonstrate how the yuan is more swayed by market forces moving forward. That would reduce bearish yuan bets eventually and make room for capital account liberalization efforts to gain entry into global bond and equity indices.