News & analysis

We learned two key things about the People’s Bank of China’s yuan strategy last week.

Firstly, the yuan is in play as a factor that Chinese authorities are willing to use in the event of further escalations in the US-China trade war. This has important implications for USDCNY strategy and majors FX in general. But it does not necessarily mean USDCNY is heading materially higher in the short run.

The second, and more important takeaway from last week’s price action is that despite the headline grabbing breach of the 7.00 level on USDCNY, the PBOC remains concerned with the bilateral USD/CNY exchange rate, and remains both willing and able to intervene to prevent what it sees as excessive volatility.

The PBOC’s continued control of the USDCNY rate can be seen in the “countercyclical factor”, or spread between the USDCNY rate implied by movements in the broad trade weighted yuan or CFETS basket, and the actual fix.

The authorities have been repeatedly setting the USDCNY fix stronger than the CFETS implied rate this week – a clear signal that they remain willing to defend the currency.

US-China relations as well as China data will continue to set the tone for the pair this week:

  • Relations between the US and China continued to worsen over the course of last week, with Beijing ending US agricultural imports and the US moving to restrict US firms access to Chinese technology companies. The implementation of Trump’s most recent threat to increase tariffs is one possible avenue of escalation – or of a sudden rally in case implementation is delayed.
  • Chinese Industrial Production, Fixed Asset Investment and Retail Sales data will be released on Wednesday morning. A significant miss in either the Industrial or Retail numbers has the potential to place further significant pressure on CNY, as well as have wide reaching repercussions elsewhere in FX, with EM, AUD and NZD likely losers.


Copyright: Bloomberg Finance LP.

Goldman Sachs Estimate of the Counter Cyclical Factor in USDCNY Fixing reaches historic high. This demonstrates that fact the PBOC is still concerned with excessive USDCNY weakness despite letting the 7.00 level go.