Despite RRR cut, FX easing risks remain – BAML

FXStreet (Barcelona) - The BofA-Merrill Lynch Team views that in spite of the RRR cut by PBoC, CNY depreciation risks still remain.

Key Quotes

“The long-awaited RRR cut that comes into effect today will inject some CNY645bn into the system, keeping base money stable and offsetting the intensifying trend of FX outflows.”

“Nonetheless, we remain focused on CNY depreciation risks, with USD/CNY still trading close to the upper limit of the PBoC's trading band.”

“Indeed, the PBoC fixed the mid-point on the higher side of market expectations today and onshore CNY spot is trading a touch weaker as well.”

"We believe investors should not dismiss China's ability to exercise nominal FX flexibility to lessen the burden on the real economy due to a disinflationary global environment. Indeed, the trend in diminishing profit growth among Chinese industrial enterprises has correlated strongly with real CNY appreciation in trade-weighted terms, implying limited economic upside for short-term CNY appreciation."

"While we retain our broader view that CNY appreciation has still further to run over the longer run, we believe the shorter-term, three-to six-month horizon will see increasing CNY flexibility, depreciation risks, and volatility by extension."