Renminbi to break through 7.0 before long

The People’s Bank (PBOC) appears to have stepped up intervention recently to support the renminbi as it has approached 7.0 to the US dollar. Many are talking about that line as a psychological threshold that would trigger capital outflows if breached. We suspect that the PBOC won’t be overly concerned: the minimal net flows of the past few months will have reassured policymakers that the risk of destabilising cross-border movements is low. In the short term, a more pressing concern may be to avoid provoking the US ahead of President Xi’s meeting with President Trump at the G20 next month. But with China’s economy facing growing headwinds and the direction of monetary policy diverging from the US, the renminbi will continue to come under pressure. Yield differentials are already consistent with a drop through 7.0 before long. The PBOC is likely to intervene to keep the pace of depreciation gradual, but we don’t expect it to hold the line at 7.0 indefinitely.