Chinese Yuan to weaken on PBoC’s “policy dilemma”

PBoC set USD-CNY fixing rate at 6.3862 this morning, compared with last closing of 6.3889. While China's central bank intends to stabilize the CNY spot rates, a strong selling CNH flows in the offshore market is seen due to concerns over China's slowdown. USD-CNH breached above 6.4650 this morning, which has pushed up USD-CNY to around 6.40 as well. 

In fact, China's central bank is facing a policy dilemma: the market liquidity is tightening due to capital outflows; nonetheless, if PBoC injects large amount of cash to ease the liquidity tightness, this will exacerbate the expectation of CNY depreciation. Therefore, weakening bias in CNY exchange rate in the near term is expected, argues Commerzbank.