USD-CNY on track for 6.80 post RRR cut – SocGen

By FXStreet Jason Daw, Research Analyst at Societe Generale, suggests that the PBoC took the long overdue step of cutting the RRR by 50bp to offset the tightening effects from significant reserve depletion.

Key Quotes

“SG economics notes that scope for monetary easing is more limited this year than last with an expected 100bp more RRR cuts and 50bp cuts in the 7-day reverse repo rate in 2016.

RRR cuts does not alter our view of further RMB depreciation. We assign a 70% chance to our base case scenario (6.80) and 30% to our risk scenario (7.50). The next few months (capital outflow dynamics and reserve depletion) will be critical in assessing which scenario will unfold.

Profiting from the short RMB trade is challenging. As such, we opt for long CNH-TWD 3m to capture favourable carry and positive correlation to upside pressure in USD-EM.”
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Source:: FX Street