Fundamental Forecast for the Yuan:Neutral
The offshore Yuan touched the strongest level in three weeks despite no Yuan reference rate was issued by the PBOC beginning on Thursday, due to a 3-day national holiday. This week, the overnight borrowing cost of the offshore Yuan soared to 7-month high in Hong Kong, Yuan’s largest offshore market, indicating a lack of liquidity in the Chinese currency. Looking forward, Federal Reserve’s rate decision to be released on September 21st will be a key event in focus for the Dollar/Yuan, as it may determine whether the pair could break above the upper bound of 6.70. Yuan’s liquidity in the offshore market and the Central Bank’s guidance could set the lower bound for the . With mixed internal and external forces, Yuan rates is expected to brace for elevated volatility.
As a major driver for the USD/CNH, discussions on Fed rate hikes this week failed to spike the pair higher. Comments from Fed voting member Brainard on Monday turned out to be dovish; Fed’s Lockhart and Kashkari brought limited impact to the Dollar/Yuan as they are non-voting members. On Friday, the August U.S. Consumer Price Index came in stronger than expected, but still,: The odds of a Fed rate hike next week remained low following the release of the print, withFed Funds markets only pricing in a 20% chance.It appears that, despite the fact that Fed’s monetary policy is still the key driver to the Dollar/Yuan. Therefore, in order to break above the key resistance of 6.70, the USD/CNH would need a more hawkish tone from the Fed, which traders may find clues for in the minutes.
Next week, traders will want to watch two indicators for clues of the lower bound of the USD/CNH: A) The PBOC’s guidance – the last Yuan fix issued by the PBOC before the holiday was 6.6726. The USD/CNH has already traded below this level. Yuan’s reference rate set after the reopen of onshore markets could tell us whether the Central Bank confirms this Yuan strength. B) HIBOR rates: tightened Yuan liquidity will increase the cost of shorting the Yuan and thus could hold the USD/CNH at low levels. The average level of HIBOR O/N in August was 1.41% and the average over the past 12 months was 2.56%. If the HIBOR read on next Monday is still significantly higher than these levels, it may indicate uneased condition in offshore and a stronger Yuan.