CNH: China Authorities Loosening their Grip, But Devaluation Unlikely

Today’s onshore spot midpoint fixing was the weakest since November, with the USDCNY midpoint at 7.1192. This might indicate that the People’s Bank of China (PBoC) is willing to let the yuan weaken further to manage depreciation pressure. This has pushed onshore and offshore yuan to their weakest levels since November.

Reports of quantitative easing are also adding to the pressure, with reports suggesting the PBoC might buy its own bonds. However, Pan Gongsheng, the governor of the PBoC, dismissed the idea that this bond trading is a form of massive monetary easing, describing it instead as a liquidity management tool.

Chinese authorities are likely to remain cautious about sudden yuan weakness or devaluation to avoid being tagged as currency manipulators, especially as export restrictions from the US and Europe increase.

Still, market participants are positioned to weaken the yuan at the slightest sign of China expanding its easing measures or loosening its grip on fixings. The yuan’s direction remains clear, although the pace of depreciation is likely to be measured. For now, the trading band for USDCNH has likely shifted higher.