Wider USD/CNY band should have no impact on markets – UOB

FX Strategists at UOB Group assessed the likeliness of the PBoC to widen the USD/CNY trading band.

Key Quotes

“The PBoC is likely to widen the USD/CNY daily trading band soon from +/-2% now to about +/- 3%. This may occur before or around the upcoming 19th National Congress of the Communist Party, to be held either in Oct or Nov”.

“With muted volatility and a stable spot currently trading near the central parity fixing rate, any daily band widening by PBoC will be largely symbolic and unlikely to have any immediate market impact”.

“Over the longer run, amidst the gradual path of US rate hikes and potential start of Balance Sheet Reduction (BSR), we continue to expect renewed gradual CNY weakness against the USD, from 6.72 now, to 6.82 by 4Q17 and 6.88 by 2Q18. Near term technical resistance is seen at 6.73 and only a move above 6.7480 would indicate that current weakness in USD/CNY has subsided”.

“Should USD strength and risk aversion return, the upcoming band widening may well inject renewed volatility over the longer run”.