• – USD/CNH sees biggest rally since March 2020
  • -After a long period of CNH appreciation
  • -A prolonged or rapid fall may lead to an intervention

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The Chinese renminbi probed below a notable level on the charts in its biggest weekly decline since March 2020, attracting speculative market attention that may soon make the following insight from a former policy committee member relevant. monetary policy of the People’s Bank of China (PBoC) .

The Chinese renminbi fell more than all G20 currencies except the South African rand this week in a price action that sent the USD/CNH exchange rate down from 6.3761 on Monday to 6.5291 on Friday , taking it to and above the 23.6% Fibonacci retracement of the April 2020 downtrend.

It is the biggest one-week increase since March 2020 and comes amid a slowing economy, which is coming under pressure from the side effects of government reforms as well as the latest lockdown measures as part of its attempted in the process of ridding the Chinese economy and country of coronavirus. .

While policymakers in Beijing have long frowned upon the two-year rally against the dollar and the 21-month rise in the trade-weighted or global renminbi (CFETS index), this week’s rapid decline quickly drew speculative market attention, make the relevance of the following.

“From August 13, 2015 to the Spring Festival in February 2016, no one knew exactly what guided the PBC in setting the RMB central parity rate. One discernible pattern was that whenever the market expected the renminbi to fall, it rose instead,” writes Yu Yongding.


Above: USD/CNH displayed at weekly intervals with annotations and Fibonacci retracements of the 2020 decline indicating likely areas of technical resistance. Click on the image for a closer inspection.


“An obvious explanation for this is that the PBC was manipulating the exchange rate to move it unexpectedly to punish those who shorted the renminbi, hoping to shatter depreciation expectations,” Yongding also wrote.

The text above is taken from China’s 40 Years of Reform and Development: 1978–2018, Chapter 17, and is insightful as the author is described by Caixin Global as “one of China’s most influential economists and a former Central Bank Advisor” and served as a member of the PBoC’s Monetary Policy Committee during 2004 and 2006.

“The startling jolt in RMB volatility makes it too difficult to know exactly where the PBoC will draw a firm line in the sand on currency depreciation. But given today’s decision, the behavior of the attackers [shown in the below image] and given the extent of weakness in other Asian currencies, that firm line in the sand has yet to be drawn,” said Stephen Gallo, European head of FX strategy at BMO Capital Markets.


Source: BMO Capital Markets.


“The fact that offshore implied forward rates and other yields barely moved (and weren’t forced higher by the PBoC) is fueling CNH’s depreciation. In terms of tactical approach to spot trading from USDCNH, our preference would be to look for opportunities to dampen the move when the time is right rather than trying to take advantage of the current momentum,” Gallo also said on Friday.

While not necessarily relevant on Friday, the above information could become relevant in any market where expectations are seen by policymakers to have become excessive or divorced from Chinese economic fundamentals.

For the reader, China operates a floating exchange rate regime managed using a range of tools, and the system is ultimately backed by the world’s largest currency reserve and its most extensive network of lines. bilateral currency exchange.


Above: USD/CNH displayed at monthly intervals with annotations and Fibonacci retracements of the 2020 decline indicating likely areas of technical resistance. Click on the image for a closer inspection.


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