CNY under pressure again as Fed hike possibility rises before end of this year

The market has begun pricing an increased possibility of the US Fed hiking rate before the end of 2016 after Fed chair Janet Yellen’s comments on rate hike in Jackson Hole. The CNY has thus come under pressure again for the time being. As the People’s Bank of China defended the USD/CNY vigorously at 6.70 level in July, a question now arises if the central bank would safeguard this level again.

The Commerzbank, in a research note, stated that the PBoC would safeguard this level. Firstly, the central bank set USD/CNY fixing rate at 6.6856 today in the morning, considerably lower than the forecast of 6.6945, added Commerzbank. This indicates that the Chinese authorities have conducted a “filtering” mechanism to restrict the upside of USD/CNY. The media reports imply that the PBoC would exclude “excess volatility” when it determines the fixing rates.

Secondly, it is beneficial for China to maintain stability in the CNY exchange rate as the country would be hosting the G20 summit next week and the yuan would be officially included in the SDR basket from 1 October.

Also, the central bank plans to keep a negligible CNY/CNH spread to smoothen the SDR operations. Past experience implies that the CNY/CNH spread tends to broaden when the market expects that CNY will weaken quickly, with volatility increase in the meantime, noted Commerzbank. However, to avert excess volatility, the People’s Bank of China is expected to ensure its currency at the key levels.

“We also expect that China’s central bank will allow the local banks to trade CNH in September, in order to narrow the CNY-CNH spread”, noted Commerzbank.