PBoC to Stop Depreciation and Celebrate; King Dollar Laughs

As article at iFeng says the central bank's thinking can be shown in 4 charts and 3 principles:

First, as the decision-making tireless, he said China's central bank is inclined to allow a greater role for the market in setting the exchange rate. This is due to a more market-oriented exchange rate mechanism, the ups and downs in the economic cycle will provide automatic balance, and promote efficiency in the allocation of resources.

China has been moving in this direction has made considerable progress, the new RMB exchange rate pricing mechanism and single-day China's central bank foreign exchange purchases are significantly reduced performance; foreign exchange purchase downsizing means reducing direct intervention in the market.

Secondly, although the central bank does not necessarily want to admit it, but a weaker RMB beneficial to the Chinese economy. In late 2010 and July last year, the yuan reached a high point of this period of time, according to the measure of real effective exchange rate, the yuan rose nearly 30%; a heavy blow to the export competitiveness, and to promote overseas sales this year so far declined. Since August 2015 only gave up some, but not all the gains; renminbi will further weaken the sluggish economic growth support.

Third, the pursuit of a more market-oriented exchange rate mechanism as well as a weaker yuan, are subject to orderly RMB fluctuations.

China central bank wants the yuan market trends in line with economic fundamentals, and now China's central bank would like to see a weak yuan. The central bank does not want to see the way expected to lead to sudden fluctuations in the yuan, the market panic and capital flight.

Last year in August, this year, in January and July and the rapid depreciation of RMB trading volume surged, seems to have led to China's central bank to take action to stabilize the market.

RMB may be bound to weaken further, while China's central bank to intervene is limited, except for the occasional suddenly entered the market to prevent the yuan exchange rate downward spiral ; in August last year and January this year after the panic of recent months there are signs that this action was operating mode good. And relatively far offshore renminbi exchange onshore spot exchange rate discount, indicating moderate devaluation expectations.

iFeng: 中国即将暂停人民币贬值 央行准备庆功了 and 四张图读懂央行的心：人民币贬值 中国央行却有意撤退？

Bloomberg: Yuan’s Best Forecaster Says This Currency Slump Is Close to Over

The People’s Bank of China will hit the brakes on depreciation to avoid sparking global volatility and exacerbating capital outflows, according to Svenska Handelsbanken, the currency’s top forecaster. The case for an end to yuan weakness is supported by its impending entry into the International Monetary Fund’s reserves basket in October as well as a dovish Federal Reserve spurring dollar declines, says JPMorgan Asset Management.

“They will take a breather now and celebrate that they have managed to depreciate the yuan without creating too much noise and without creating too much capital outflows," said Bjarke Roed-Frederiksen, a Copenhagen-based economist at Handelsbanken, the most accurate yuan forecaster tracked by Bloomberg over the last four quarters.

..."I think they realized they probably shouldn’t move any further for the moment," he said, adding that the PBOC may opt for slight depreciation again in the fourth quarter to finish the year at 6.8 a dollar. "They are satisfied with what they have achieved for now and they are -- or at least should be -- afraid global investors’ focus will return and also that domestic investors will start worrying again about depreciation and thus increase capital outflows."

..."The current depreciation should probably come to a close in the near term," Tai Hui, chief Asia market strategist at JPMorgan Asset Management, said in a briefing in Hong Kong. "The authorities want to maintain domestic investor confidence. We are running up to the Group of 20 meeting in September and SDR inclusion in October and typically ahead of these key events, the currency is kept relatively stable -- again, to give people confidence."

China did a political stabilization in 2015 and for its efforts ended up forced to sharply devalue in August. From May 2015: PBOC Propping Up Yuan Ahead of SDR Inclusion. If they do this again, they will either be caught short by the market before hand, possibly weakening in September or October, or they will hold off until later and end up devaluing right when the new American president takes office. This assumes the dollar doesn't force their hand sooner.

Bloomberg: Yuan Weakness Does Little to Spur Pessimism in Forwards: Chart

Financial markets from Chinese shares to Asian currencies are so far unfazed by the yuan’s decline to a 2010 low as central bank policy becomes more transparent. The lack of alarm is reflected in 12-month non-deliverable forwards, whose discount to the spot rate has narrowed even as the exchange rate extended its decline for the year to 3 percent.

Markets are always right! If you think this market is right, check out the geniuses in the oil market who predict 3 percent annual increase in oil prices out to 2024. First is the chart with a $20 range on the Y-axis, then with an $80 range that has been the price range over the past three years.

Oil is an apt market to compare because like the yuan, it is heavily influenced by the U.S. dollar. Neither oil nor the yuan will follow the U.S. Dollar Index (DXY) back above 100. (In the chart below, DXY is inverted.) Since August 2015, the yuan has moved inverse to the U.S. dollar, appreciating versus the dollar when it weakens and depreciation versus the dollar when it strengthens. Oil and the S&P 500 Index also behaved similarly, although both of those have deviated in the past three months...