Reluctant RMB depreciation to continue, but remain moderate: Natixis

July 6, 2018

HONG KONG - Recent depreciation of the RMB has caused global concerns, with the USD-CNY increasing from 6.388 to 6.729 against the greenback to reach its most depreciated point since August 2017, says the French banking group Natixis in a research note.

But RMB weakness is very different from the past as the dollar has been stable against other currencies (the USD index stuck at 95) during rapid RMB depreciation since mid-June.


“In fact, the RMB has depreciated against other currencies as shown by the sharp decline in the RMB basket index (CFETS) from 97.8 to 95.1,” Natixis says.


“Some analysts interpreted the RMB’s sudden depreciation as another instrument in China’s retaliation toolbox against Trump’s trade war.


“However, according to our calculation, the PBoC has actually been leaning against the RMB’s depreciatory wind rather than pushing for it.”


Since late June, Natixis says, the PBoC has significantly increased the use of the countercyclical factor to smooth out rapid depreciation.


“There are even signs that the PBoC has engaged, directly or indirectly, in intra-day intervention to ease the market panic right after USDCNY broke the 6.7 level on July 3,” it says.


“The two key reasons for such strong depreciation are market driven.


“The first is external, related to large capital outflows from emerging markets since June, from which China cannot insulate itself fully even with capital controls.


“The second is domestic, related to the PBoC’s monetary easing on the back of a decelerating economy and the liquidity crunch due to the clamp-down on the shadow banking.


“The increasing divergence in monetary policy between the U.S. and China is also pushing for the RMB depreciation.”


Nastixis says that, based on its expectation of additional cuts in the PBoC’s reserve requirement ratio (RRR) and no sign of an immediate solution to the Trump-led trade war, an additional depreciation of the RMB “should remain in everybody’s mind”. 


“However, let us not forget that a strong depreciation does not have the PBoC’s support and will, thus, not happen aggressively, as shown by our analysis on the countercyclical factor.


“That said, two caveats are still worth mentioning.


“First, if China and the U.S. were to reach some kind of trade agreement, the net capital outflows from emerging markets may reverse.


“Second, if the U.S. economy finally started to decelerate more than expected, the net inflow into the U.S. may also stagnate.


“However, both scenarios are not likely to happen in the near term and we continue to expect a gradual RMB depreciation in the upcoming months.” (ATI).