CNY to appreciate if KRW included in CFETS index in near future

South Korea is the fourth largest foreign trade partner of China; however, the South Korean won has not been included in the official CFETS index yet.

This is because when China initiated the CFETS index in December 2015, the nation had not begun the “CNY/KRW direct trading”. China foreign exchange trade system, which is the nation’s onshore FX trading platform, stated in June 2016 that it would begin CNY/KRW direct trading from 27 June 2016. With the close trade relationship between both the nations, it seems likely that the South Korean won might be added into the CFETS index in the near future, said Commerzbank in a research note.

“Based on our estimates, we think that KRW will take roughly an 11 percent share in the CFETS Index. Assuming that the 11% will be deducted by other basket currencies on pro rata basis, we estimated a new CNY CFETS index using the new weights,” added Commerzbank.

If the South Korean won is included in the CFETS index, the new index might be a bit lower than the current index implies. This is mainly because of the recent strengthening of the South Korean won. The KRW, since 27 June, has appreciated considerably. It rose 3.88 percent against the USD and HKD, 8.43 percent against JPY, 4.52 percent against EUR and 4.77 percent against GBP.

At this point, if the KRW is included in the index, CNY requires appreciating 0.4 percent against the currency basket to avoid an external shock on the CNY CFETS index.

This might partly clarify the recent market intervention that appreciated CNY. Given this backdrop, there is a likely upside risk to USD/CNY for some time, noted Commerzbank. Furthermore, as China would host the G20 summit in September and the CNY’s SDR inclusion becoming effective on October 1, China does not seem to be interested in steering another round of depreciation in the third quarter, according to Commerzbank.