Chinese yuan strengthens while PBOC catches up12 October, 2012, 11:37. Posted by Zarathustra
Chinese Yuan hits the highest level in 19 years in the onshore market.
The perception of the market regarding Chinese Yuan has changed 180 degrees since the summer. It started out in the summer being consistently weaker than the PBOC fixing, and now it is very strong compared with the PBOC fixing. For a while, we noted that PBOC fixing has not reversed the weakening trend and remained relatively unchanged even though the market has been moving in an opposite direction. It seems that, however, PBOC is perhaps catching up with the market, finally (or see another theory, via WSJ).
The recent strength of Chinese Yuan might reflect the change in the direction of capital flow, as we have been speculating for sometime. In particular, we thought that if ECB’s OMT and Fed’s QE-Infinity are able to improve risk appetite to a point where the trend of months of outflows is reversed, that will improve liquidity condition in China, which is positive for China as long as inflow is sustained. Inflows will also certainly reduce the need for monetary easing as long as the inflow is sustained.
Before the holiday, inflows (if there is any) has not helped the liquidity crunch, and liquidity injection remains necessary even after the holiday. We will not have any idea if this is really a sizeable inflow until a month or two later, so we can only guess for the time being. Since inflow will only be sustained if market perception of China’s growth prospect improve, the big question is whether the potential improvement in economic activities in the final quarter of the year will be sustainable.