DailyFX.com -
Fundamental Forecast for the Yuan: Neutral
-
China’s Market News: The PBOC Tightens Liquidity through MLF Rate Hikes
-
Check out DailyFX webinars for more trading ideas.
The offshore Yuan strengthened to 6.7919 against the U.S. Dollar as of 12pm EST on Friday, the strongest level in two weeks. At the same time, the offshore Yuan remained stronger than the onshore Yuan, with a spread of more than 700 pips. The offshore rate also traded about 600 pips stronger than the Yuan fix set on Friday, when the PBOC resumed issuing the guided level after a week-long holiday for the Lunar New Year. Looking forward, a heavy Chinese calendar as well as China Central Bank’s moves could be major drivers to Yuan rates.
Amid an unclear outlook of Fed’s rate hikes, Dollar/Yuan rates could look for more clues from China’s side. The PBOC introduced additional tightening measures on liquidity on Friday, indicating a fully shifted tone on credit. The regulator lifted 7-day reverse repos rate by +10 basis points to 2.35% after kept the rate at 2.25% for 15 months. 14-day and 28-day reverse repos rates were increased by +10 basis points each as well, to 2.50% and 2.65% respectively. Also, the Central Bank raised rates of Standing Lending Facility (SLF) by +35 basis points for overnight borrowing and +10 basis points for both 7-day and 1-month. Right before the Lunar New Year, the regulator increased two Medium-term Lending Facility (MLF) rates. Both SLF and MLF are loans targeted at Chinese policy banks and national commercial banks.
“China’s monetary policy has been set to be ‘prudent’ since 2011; however, during some of the periods, it was actually prudent and slightly loose”, stated by the PBOC’s Assistant Governor Zhang Xiaohui in an article published two days ago. As a result, China’s monetary policy needs to return to “prudent and neutral in 2017”, according to her. Interest rate hikes mentioned above are measures designated to achieve this target. Over the following periods, the regulator will focus on curbing excessive credit and high leverage, as well as fixing the transmission mechanism of monetary policy.
China will publish the January New Yuan Loans print between February 9th and 15th, a key indicator for China’s growth in credit that may directly impact PBOC’s next moves. The gauge is expected to double to 2.380 trillion Yuan in January from 1.040 trillion Yuan last December, according to Bloomberg. If that is the case, such a high level of credit will add pressure on the PBOC to further tighten liquidity and in turn, may provide some support to Yuan rates in the short term.