Fixed Income Research & Macro Strategy (FIRMS)

  • The Renminbi Nominal Effective Exchange Rate (NEER), which had appreciated 3.5% in the two months up to 5 March 2019 and then traded in a narrow 1% range in the following two months, has since 2 May depreciated 2.1% to its weakest level since 25 January.
  • This is broadly line with our view that “the PBoC could conceivably slow or even temporarily reverse the Renminbi’s appreciation, irrespective of the pace of progress in trade negotiations with the US” (see Politics and geopolitics driving currencies, central banks in stasis…for now, 5 March 2019).
  • This pattern in the Renminbi is very similar to that of May-June 2018 (see Figure 2). The Renminbi NEER had been broadly stable in the 6 weeks up to 14 June 2018 but then weakened about 2.5% over the following fortnight. It weakened a further 3.8% in the month to 27 July 2018, before stabilising and staging a modest and short-lasting recovery.

Renminbi NEER

  • Chinese policy-makers’ motivation to allow and ultimately encourage Renminbi depreciation in the past fortnight – namely retaliation for an escalation in the trade war with the US and a loosening of monetary policy to stimulate Chinese growth – are not too dissimilar to a year ago, in our view.
  • The Renminbi has been broadly stable in the past 3-4 sessions, suggesting that the PBoC is keen to keep a tight leash on its currency and avoid a repeat of its August 2015 devaluation which rattled both domestic and international financial markets. The consensus forecast is that near-term the PBoC will intervene in the FX market to stop USD/CNY spot from breaching the psychologically important level of 7.00.
  • However, unless the US and China quell this trade war and/or Chinese economic growth rebounds in the very near-term – which we think is unlikely – the risk is that the Renminbi resumes its downward path.
  • Looking beyond the next few weeks, US Presidents Trump and Jinping could conceivably try to bridge the gap in their current stances and announce (some) progress in negotiations ahead of the G20 Summit on 28-29 June. This could in turn see Chinese policy-makers shoring up or even appreciating the Renminbi, in an implicit sign of goodwill.

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Ryan Littlestone

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