After the mini-devaluation in August 2015, the PBoC begam to allow the renminbi to move quicker in the direction of market forces, but it has been able to control the speed of convergence by FX interventions and capital controls.

Ever since the FX mechanism by the Chinese central bank, we saw a sharp fall by the Yuan, but since April, the tactic has shifted to a slower move that has ruffled remarkably few global feathers and thereafter, exatly a year ago, yuan was trading at 6.3180 (Nov’2015) against the dollar, that’s when (November/January 2015), the pair carried it’s rapid spike (it reached 6.7 mark in July 2016).

However, the steady depreciation trend of the USDCNY (annualized pace of 7.3% since August 2015) has only solidified expectations that the renminbi has further to depreciate against the dollar. That is, pursuing a soft landing approach has only made it more difficult to maintain this strategy.

Now is the time of president-elect Trump: The anticipation of his domestic policies of substantial tax cuts and infrastructure spending has triggered significant strengthening of the dollar and complicated the PBoC’s controlled approach since 8 November.

Furthermore, the unpredictability with respect to Trump’s trade policies adds a whole new layer of uncertainties surrounding the Chinese currency regime in the coming years.

Elsewhere, the linkage between the exchange and interest rate differentials has strengthened in recent years. Since the USDCNY uptrend began in 2014 the rate differential has consistently moved in tandem with of a stronger USD against the CNY. The combination of the US 2yr yield creeping higher and Chinese 2yr bond yields dropping has promoted a 250bp increase in the US-China yield spread.

With Chinese policymakers expected to keep liquidity conditions easy to mitigate downside growth risks through the structural slowdown and the Fed set to embark on three rate hikes in 2017, rate differentials should keep upward pressure on the USDCNY.