After widening its tolerance for real world volatility mid-March, the PBOC has faced a daily battering of USD buyers and CNY sellers which have driven the Chinese currency to its weakest level in over 18 months. However, things are starting to become problematic… while call buying and hedging is exploding – as carry traders and local specs rush to cover exposures, Bloomberg notes that Morgan Stanley fears as the yuan approaches the lower end of PBOC’s permissible daily trading range, anticipated intervention to defend band could put other currencies under selling pressure. The last time – Summer 2012 – that the PBOC defended its currency, EUR came under selling pressure but as Morgan Stanley notes, “In the very unlikely case” of PBOC not defending band, FX volatility would surge globally with implications going beyond RMB as markets would assume China’s economic problems might be significant… whocouldanode?
The Yuan is now trading 1.8% below (above on the chart) its fixing and near the 2% band limit the PBOC expanded to in March…
Bloomberg reports that as yuan approaches lower end of PBOC’s permissible daily trading range, anticipated intervention to defend band could put currencies under selling pressure, helping USD, Morgan Stanley says in note.
CNY at 6.2659 now, trading 1.8% below today’s fixing at 6.1580; PBOC widened daily trading band to 2% on either side of fixing in March
When a similar situation occurred in June-July 2012, PBOC used $80b of reserves to defend band and, as this operation required China’s reserve managers to sell currencies to boost USD intervention fund, EUR came under selling pressure then, MS says in client note today
MS says it is more likely that China will seek controlled devaluation, pushing USD/CNY fixing higher, allowing CNY to drift lower within the band; this would be USD-positive
But “In the very unlikely case” of PBOC not defending band, FX volatility would surge globally with implications going beyond RMB; markets would assume China’s economic problems might be significant, putting commodity currencies at forefront of global selling interests
What could given them that idea!!??