China: PBoC announces measures to stabilize FX market expectations – UOB

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UOB Group Economist Ho Woei Chen, CFA, and Senior Currency Strategist Peter Chia review the latest measures introduced by the PBoC.

Key points

“The People’s Bank of China (PBoC) reintroduced the reserve requirement rule for CNY forward sales by banks, raising the required ratio back to 20% from 0%, from September 28. This will increase the cost of buying foreign currency using forward contracts and therefore will reduce the incentive for bearish bets on the CNY and will stabilize foreign exchange market expectations.”

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“This year, the central bank has also cut the required reserve ratio for foreign currency deposits (FC RRR) twice, in a total of 300 basis points. The latest reduction of 200 basis points, to 6%, took effect on September 15. This series of measures aims to curb the pace of CNY depreciation, given the Fed’s more aggressive rate hike path and weak growth forecast in China.”

“Previous episodes where 20% risk reserve requirements were imposed in 2015/2016 and 2018 showed that it will not be enough to reverse the trend of USD/CNY. The CNY will most likely continue to depreciate along with other trading pairs against the USD, as the Fed is likely to continue its aggressive rate hikes in the coming quarter (4Q22). Thus, we think USD/CNY is likely to stay above 7.0 for the foreseeable future.”

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Source: Fx Street

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