Offshore renminbi flirts with record low

Posted on October 24, 2016

China’s offshore renminbi was within a whisker of chalking up a record low on Monday.

Triggering the move was the People’s Bank of China’s decision to fix the daily level around which the renminbi, or CNY, is allowed to trade weaker by 0.2 per cent at Rmb6.769 per dollar, the weakest level since early September 2010.

Unlike CNY, the offshore rate – CNH – is traded outside the mainland (mainly Hong Kong) and not subject to a trading band. In response to the today’s PBoC fix, it softened to Rmb6.7842 per dollar, which is its weakest level since September 1, 2010. It has since recovered slightly to sit 0.1 per cent weaker for today at Rmb6.7801.

It was in July 2010 that Hong Kong became the first place outside the Chinese mainland to have an interbank market for renminbi. CNH’s price history starts in late August of that year (according to Bloomberg data), and it was on September 1 that the offshore rate was at its weakest level on record of Rmb6.785.

At the start of October, the International Monetary Fund decided to include the renminbi in its special drawing rights basket. Strategists noted the currency had been relatively stable in the lead-up to the decision, but think Beijing may become now more comfortable with it weakening following its SDR inclusion.

Zhou Hao at Commerzbank notes that recent data compiled by China’s State Administration of Foreign Exchange showed individuals and businesses bought a net $26.8bn of US dollar-equivalent foreign currencies in September, the most since March, in a sign China continues to face capital outflows despite authorities implementing capital control measures.

But Mr Zhou adds:

As headline growth has stabilized and the overall policy tone turns to “risk control”, we believe that China’s monetary easing in the coming quarter will be less aggressive than estimated. Against this backdrop, a rate cut before the end of this year is hardly on the table.

On the FX front, a soft CNY can be expected to help bolster the economy somewhat, which could partially offset the possible slowdown in domestic demand due to property tightening. In the meantime, capital outflows could emerge as Chinese investors are likely to turn to offshore property market for opportunities. All said, there exists an upside risk in USDCNY exchange rate for the time being.

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