Why RMB appreciation has suddenly gone into reverse

February 21, 2014

HONG KONG - After a sustained period of appreciation, in which the RMB reached a record strength at 6.04 per USD on January 13, over the past week the currency has suddenly reversed course. The onshore spot rate has depreciated by almost 1% since mid-January, its largest decline since mid-2012, standing at 6.09 at present (one-year forward NDFs have also depreciated).

What accounts for this reversal? BBVA Bank researchers believe it is largely due to temporary factors, and that appreciation will resume in due course, in line with BBVA’s end-year forecast of 5.90 per USD.
“Despite occasional concerns about slowing growth (recent PMIs have weakened), external flows have been robust on strong exports and trade surpluses,” BBVA says.
“Some of the depreciation is likely to be due to seasonal factors, given strong demand for local currency around the time of the Chinese New Year. Beyond that, it appears that the depreciation may be policy-induced as the authorities seek to push the exchange rate toward the middle of the daily ± 1% trading band (the spot rate has consistently been at the strong end of the band September 2012). 
“This effort could be a precursor to a widening of the daily band, which has been expected for some time, in order to enhance two-way flexibility of the currency. We also expect the authorities to continue gradually liberalising the capital account, as emphasised in their reform agenda at the Third Plenum last November.” www.bbvaresearch.com (ATI).