CNY-CNH spread could narrow on SDR discussion

After U.S. President Barack Obama and Chinese President Xi Jinping met Friday in Washington, the two sides issued a statement saying the U.S. supports the inclusion of the Chinese renminbi (RMB) in the IMF's SDR (Special Drawing Rights) basket "provided the currency meets the IMF's existing criteria in its SDR review".

The CNY-CNH spread narrowed to around 200pips following this statement, compared with almost 600pips that was seen on the morning of 24 September. 

China's central bank has strong incentives to narrow the CNY-CNH spread, as IMF stated before that "deviations between the offshore (CNH) and onshore (CNY) RMB exchange rates raise potential operational issues", implying that "CNH cannot be a perfect hedge for CNY-based exposures". 

"That said, China's central bank will likely continue the intervention in CNH market to cap the upside of USD-CNH, thus maintaining a narrow spread between CNY and CNH", says Commerzbank.