RMB may be ‘turning corner’, says JP Morgan Private Bank in latest currency note
China’s currency may be back on a firm path to appreciation, now that the country’s leadership issue has been settled, according to latest thoughts on FX markets from JP Morgan Private Bank.
Weekly Currency Thought: CNY – Light around the corner
After weakening for the greater part of the year post Q1, the Chinese renminbi or yuan (CNY) now seems to have turned a corner, appreciating gradually over the past 2 months (+0.80%).
With the unveiling of China’s new leadership now firmly behind us (at the 18th Party Congress of the Communist Party of China), the market has now squarely refocused on the fundamentals, which recently, have begun to look a lot more positive.
Last week’s HSBC Flash PMI for instance came in at 50.4, signalling a mild expansion and a sound reason for optimism given that previous 13 monthly data releases were all below 50.00. Moreover, USDCNY, which is allowed to trade within a ±1.00% band around the daily PBOC fixing, has experienced a marked turnaround from largely trading at the upper end of the band in late July to now flirting with the floor on a daily basis since October. This indicates a shift in market sentiment from bearish to bullish CNY looking forward.
It is also worth noting that up until recently, the price action of CNY (as measured by the PBOC fix) and CNH, (offshore yuan in Hong Kong) exhibited significant divergence whenever market sentiment turned extreme; CNH being the higher-beta variant.
This divergence has shrunk markedly over the second half of the year, a sign that the renminbi currency market is maturing. Following the CCPC, several high level finance officials including the PBOC Governor Zhou Xiaochun, have publicly committed to maintain the path towards full convertibility of the RMB, as it remains a crucial step in the financial liberalization of Chinese capital markets. In turn, a number of currency markets players, specifically real money and retail investors, have taken these comments to heart by aggressively adding to or establishing new RMB long positions.
GBP: Changing of the guard
In an unprecedented move, the UK Treasury appointed its first non British governor in the Bank of England’s 318 year history.
Mark Carney, who is Canadian and the current governor of the Bank of Canada, got the job. Carney is undoubtedly the pick of the new generation of central bankers, having helped steer the Canadian economy through the recession comparatively unscathed. The fact that the Bank of Canada does not publish minutes or a voting record of its meetings makes it hard to place Carney as a dove or hawk relative to the views of others.
For Sterling itself the impact has been limited, although the latest Bank of England Financial Stability Report (FSR) suggests Britain’s banks face a potential financial black hole of up to £60bn ($96bn) from regulatory demands. The outgoing governor, Mervyn King, stressed that no more taxpayer money would be used. He stated banks may need to raise capital or take steps to restructure their balance sheets.
Separately, BoE deputy governor Charles Bean has said that he and his MPC colleagues “haven’t closed the door forever on further asset purchases” due to concerns of a renewed UK economy slowdown. With lending to households weakening in October (net mortgage lending down £0.2bn ($0.32bn), from £0.6bn ($0.96bn) in September), Sterling may find it difficult to appreciate much further from current levels.