CNY weakness to continue - Commerzbank

Analyst, Peter Kinsella at Commerzbank expects CNY weakness will continue as PBoC engineer a modest depreciation in 2017.

Key Quotes

“Although conventional wisdom argues that CNY is artificially cheap, in REER terms CNY is by far the most expensive EM currency. As China transitions towards a consumption based economy a weaker exchange rate will be a key policy tool. The risks for CNY are numerous. If the USD appreciates more aggressively this could lead to higher capital outflows as corporates repay USD denominated debt. This will lead to a decline in FX reserves, which fell by over 1 trillion USD in the last 2 years alone. In October and November the up move in USD-CNY was a reflection of USD strength rather than general CNY weakness. The RMB CFETS index didn’t depreciate to any significant extent.” 

“We expect that PBoC will allow CNY to weaken further but will step into the market if volatilities and outflows increase markedly. The corollary of further CNY weakness is that export competitors such as KRW and TWD will also display further weakness. Indeed, we think KRW should become a favourite funding currency in 2017. It will depreciate due to stronger USD exchange rates and could weaken even further if CNY depreciates more aggressively than expected.”