PBoC's Counter-Cyclical X-Factor Returns

The PBoC reintroduced its counter-cyclical X-factor this week.

Reuters: Yuan hits four-week high as China signals support, revives X-factor for fixing
The announcement was seen as the latest signal from the People’s Bank of China (PBOC) that is not comfortable with further depreciation in the yuan which could spark capital outflows from the cooling economy.

The move late on Friday came a day after the latest Sino-U.S. talks aimed at resolving the trade dispute ended with little progress, with tougher U.S. measures expected to kick in next month that could add more pressure on the Chinese currency.

...“Should China’s economy decelerate more than expected, the pressure on RMB weakness may come back again. Otherwise, we expect the USD/CNY to stay below 7 comfortably,” he said.

The PBOC said it was adjusting how the yuan’s official midpoint was calculated to keep the currency more stable amid dollar strength and trade tensions, but gave no details as to how the new “X” factor is derived.
What is the X-factor? Over the past couple of weeks of U.S. dollar weakness, the X-factor could be nothing more than a bluff. China can say whatever they want as long as markets are relatively stable and reserves hold steady. It might also involve shifting the weight of the dollar in the basket.
The last time the PBoC introduced its counter-cyclical factor was in the midst of a 10 percent rally in EURCNY.

Bloomberg: China Considers Changing Yuan Fixing Formula to Curb Swings
The PBOC’s move “validates our views that yuan devaluation is not a weapon of the trade war,” Mizuho Bank analysts said in a note.

“It also resonates with our ‘7-3’ stability threshold hypothesis, which refers to not breaching 7 for dollar-yuan and FX reserves not falling below $3 trillion.”
A 3 percent move in the yuan would send USDCNY past 7.00. This is a very tight window for stability. If China has to choose between USDCNY 7.00 and $3 trillion in reserves, it will choose $3 trillion in reserves because reserves are a stabilizer. If USDCNY slides to 7.5 amid a 10 percent U.S. dollar rally and the country still has $3 trillion in reserves, a run on the yuan is less likely than if China spends a couple hundred billion defending 7.00.

No comments:

Post a Comment