Pressure on a weakening RMB is continuing: Natixis

HONG KONG – After the RMB’s rebound in early January, the CNY and CNH were under renewed depreciatory pressure in February (-0.4%) in light of a stronger USD (+1.6%). That weakening trend has extended and been reinforced in March by a more hawkish Fed. Market, which has priced in 3-4 Fed rate hikes in 2017, according to global asset manager Natixis.

“The CNH-CNY spread further narrowed to 217 bps in February (CNH stronger) but that is still larger than the average of 2016 (113bps),” Natixis says. But the market continues to bet on weaker CNH and wider CNH-CNY gap in the future.”

It says China’s FX reserves have rebounded for the first time in eight months (+0.2%MoM or +$6.9bn) at a time when China recorded its first trade deficit since early 2014. While the strong USD in February devaluated non-US assets in China’s reserves. “This suggests outflow pressure eased slightly last month.

“Although the RMB depreciated against the CFETS basket in February (-0.4%), it has - in contrast to CNY and CNH - so far gained value against its trading partners in March, thanks to 1) the USD’s strength across the board and 2) the diluted importance of USD in the basket.

“Net injection from PBoC dropped significantly in February compared with January as 1) a large amount of lending matured after the Chinese New Year and 2) demand for liquidity fell. Tightened liquidity condition pushed up SHIBOR and sovereign yields gradually in February.”  www.natixis.com (ATI).