The renminbi has weakened 2.5% against the US dollar since mid-August and is nearing our year-end forecast of 7.00/$. This is mostly a reflection of broad dollar strength – the renminbi is little changed in trade-weighted terms. Even so, the PBOC is pushing back. It has been setting daily fixing rates that are stronger than what’s warranted by market conditions and it reportedly called up several banks last week, telling them not to aggressively sell yuan. This aligns with our view that the PBOC will intervene to prevent the currency from going much beyond 7.00/$, for fear that doing so would leave expectations unanchored and exacerbate outflow pressures. Admittedly, the PBOC will likely acquiesce if market pressure intensifies – it doesn’t want the exchange rate to become too divorced from fundamentals. But as it happens, we don’t think the China-US yield differential, a key driver of recent outflows, will move much further against the renminbi. If we are right, then it should be viable for the PBOC to hold the line around 7.00/$.
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