PBoC reigns – Yuan offshore-onshore spread vanishes

People's Bank of China depreciated the Yuan fix by 0.51% last Thursday drawing attention around the world, especially when mainland rate wasn't calling for such devaluation, most suggestions around the world circled around that PBoC might be looking to depreciate Yuan, similar to August. While such a speculation wasn't unjustified totally, given the size of the depreciation was largest since August, we thought otherwise, available at http://www.econotimes.com/What-might-PBoC-be-up-to-139351

As you can see, we at FxWirePro, thought PBoC's move was right and motive might not be to depreciate Yuan but to reign on its offshore counterpart, which just increased above 2% on the previous day. So, it was vital for PBoC to reign on the spread to assure market of its ability, otherwise soon market might start quoting the two rates further apart, decaying importance of onshore Yuan.

Today's series of actions by PBoC has finally been able to reign over the spread and Offshore Yuan has fallen to parity against onshore counterpart.

What now?

Due to weakness in Chinese economy, outflow pressure is likely to stay here, putting pressure on Yuan to the downside against Dollar. While PBoC is likely to loosen some of its grip again going ahead but it would keep both onshore and offshore counterpart in check.

Moreover, if you can remember, PBoC launched a Renminbi index, which we discussed here, http://www.econotimes.com/Renminbi-series-%E2%80%93-PBoCs-change-in-approach-to-Yuan-130457 . As you can see, it is somewhat similar to Dollar basket. PBoC is likely to sell it to the market through its actions and Yuan's movement would get more linked to the index.

VERY IMPORTANT TO TAKE NOTE -

While we know pegs are not easy to maintain and market usually takes charge to and reign on any misalignment. However, there is an important lesson though in Yuan's spread movement in last few days.

PBoC do have ammunition...so don't take it lightly. This central bank may not be in any sweet spot at the moment.....but it has its complex and opaque mechanisms to reign on market.

So the kitty has claws......beware, when betting against it.

Sounding dramatic......recent days' Yuan move and HIBOR's jumps are no less.