RMB Appreciation Comes to a Halt

RMB appreciation has come to a halt following PBoC’s removal of the foreign exchange risk reserve requirement and a firm dollar. In September, USDCNY and USDCNH depreciated 0.95% and 0.76%, respectively, according to Natixis Research.

The funding cost rose during the past few months, especially at the short end of the curve. CNH HIBOR and SHIBOR both edged up towards the quarter end and the same holds true for forward rates. However, Natixis expects forward rates and liquidity to ease as depreciation sentiment moderates.

FX reserves continued to increase to USD3108.5bn, the highest level since October 2016. The straight jump in reserves following a stronger dollar, along with Chinese government’s increasing holding of US bonds, points to a potential PBOC’s intervention in the forex market to reverse the RMB’s appreciation trend.

“The central bank pumped little liquidity in September and but drained liquidity in the first week of October although this will change as we move into the month due to the targeted cut in RRR,” says Natixis Research.

“Given the laxer liquidity environment, we expect the RMB to bear more pressure towards the year end but stability will still be the theme before the Party Congress.”