CNY weakness despite capital outflow stabilization - TDS

Sacha Tihanyi, Senior Emerging Markets Strategist at TDS, suggests that despite a pace of depreciation in CNY over the past 2.5 months, the short term capital outflows have moderated significantly.

Key Quotes 

“Despite a pace of depreciation in CNY over the past 2.5 months that has come close to the (very market disruptive) rate during December and January, banking sector transactional data from SAFE suggests that short term capital outflows have moderated significantly, with banks net selling $1.6bn in FX forwards and spot to clients during May, the lowest since June of last year.

The greater balance of FX purchases were in the spot market (at $10.4bn) while customers of banks net bought/settled new renminbi forward positions to the tune of $8.8bn, the 2nd consecutive month of net positive CNY forward purchases.

The latter suggests that previous CNY forward hedging behaviour, on the assumption of potential steep, “uncontrolled” rates of deprecation has moderated on a net basis, implying less current panic and that hedging behaviour has now caught up with the expectational shift in valuation.

The success in the PBoC’s effort to better communicate its policy stance as it relates to the renminbi has allowed continued lower CNY fixes without great fanfare, as policy makers have emphasized stability in the renminbi indices (CFETS, BIS, SDR), which doesn’t necessarily mean an absence of a trend but rather a stable evolution in this trend.

We still view fundamental pressures on CNY to continue, and while micro market level data on bank transactions show a lessening in outflows, balance of payments data continue to show outflow pressure as investment flows across portfolio, FDI, and “other” investment continue to weaken or are deeply negative, made worse by the absence of an offset in the form of a current account surplus expansion.

Media has also recently reported policy maker indications of the notion of the tolerability of CNY weakness to 6.80 during 2016, not far from our long-standing call for 6.88 by year-end; this is a subtle attempt (in our view) to condition the market to become accustomed to the notion of further depreciation so as to avoid the concerns and volatility of December/January.”