China: Strong reasons for the PBOC to stay the course – ING

By FXStreet Tim Condon, Chief Economist at ING, assumes that the PBOC is likely to keep the NEER steady and ING’s forecast that USD/Majors will be range bound is behind their yearend 6.47 USDCNY forecast.

Key Quotes

“We credit more predictable PBOC USDCNY fixings since the second week of January and the tightening of exchange controls/macropru for the swing in monthly reserve changes from US$100 billion per month of outflows in November-January to a US$10.3 billion inflow in March. The first increase in five months put reserves at US$3.213 trillion.

We think there are strong economic and political reasons for the PBOC to stay the course when it comes to its fixing policy. There is some uncertainty about what that course is, however. Estimates of the CFETS NEER currency basket, including ours, show a steady depreciation since March, which has been a period of general USD/Majors (DXY) weakness.

When DXY depreciates the PBOC should fix USDCNY lower (appreciate CNY) to keep the NEER steady and vice versa. However, we think the PBOC reacts asymmetrically to changes in DXY: when DXY depreciates the PBOC depreciates the NEER by fixing USDCNY higher than would be consistent with an unchanged NEER. We think it keeps the NEER …read more

Source:: FX Street