China to allow CNY to become mkt determined – Nomura

By FXStreet Analysts at Nomura explained that the Chinese government will likely reiterate the need for market reform of the CNY exchange rate system at the NPC.

Key Quotes:

“We believe authorities will gradually allow the CNY FX rate to become more market-determined this year amid occasional FX market interventions (such as by managing the fixing and directly intervening through buying/selling) to dampen speculative positioning.

Indeed, in his 14 February interview with Caixin, PBoC Governor Zhou said that “the process of RMB internationalisation will move forward like waves”, and qualified that “if speculation becomes the key problem in the foreign exchange market, we’ll emphasize on dealing with speculation”.

However, the concern over such intervention stem from the potentially rapid drawdown of FX reserves. There are some in the market who believe that a one-off large devaluation would cool CNY depreciation expectations and avoid a large decline in FX reserves, but we believe this is unlikely in coming months, as it would be too costly from both a political and, to some extent, an economic perspective.

In addition, we believe China’s FX reserves remain adequate to hold the RMB stable in coming months. Rather, we think increased supervision to prevent the abuse of capital flow channels is …read more

Source:: FX Street