Renminbi to benefit from US rate hike

The US Federal Reserve raised interest rates by 25 basis points, to the new target range of 0.75–1%. In response to the well-anticipated rate hike, the PBoC also raised market-based policy rates by 10bp today.

While concerns over the renminbi exchange rate have been widely raised, the renminbi, however, saw an appreciation against the US dollar since the rate hike was announced. “In the short term, the depreciating pressure of renminbi against US dollar is released. But the monetary policy is yet to be expansionary,” notes Jiang Chao and Liang Zhonghua, analysts at Haitong Securities.

“Trump’s tax reform, debt cap in US, expectation of a rate hike in June, European elections, and US economic data will bring a lot of uncertainties to the US dollar in short term, which is conducive to stabilizing the renminbi,” says Hua Changchun, analyst at Guotai Junan Securities.

The work report of the National People's Congress said that China will stick to its renminbi reform and keep the currency stable. Chinese analysts say this signals that China will prevent the renminbi from depreciating too much. It is expected that China will boost renminbi internationalization once the value of the currency becomes stable. In addition, China will also make efforts to control the fluctuation of the exchange rates to within a certain range.

“Over the rest of 2017 we still expect the US dollar to strengthen gradually and peak against Asian forex sometime in Q3. In the near term, if there is further US dollar weakness, the likely initial beneficiaries will be the Singapore dollar, Korean won and Taiwan dollar. The PBoC will probably continue to keep the renminbi fairly stable against the basket, which means in a weak US dollar environment the CNY will weaken against the non-US dollar portion of the basket, including the won and Singapore dollar,” says Julian Wee, senior markets strategist Asia, at NAB.

On 2016 December 29, the PBoC (People’s Bank of China) announced that it was planning to add 11 new currencies into the currency basket of the renminbi exchange rate index of the China Foreign Exchange Trade System starting January 1 2017.

Currencies include the South African rand, the South Korean won, the United Arab Emirates dirhams, Saudi riyal, Hungarian forint, the Polish zloty, Swedish krona, Norwegian krone, Danish krone, the Turkish lira and the Mexican peso. After this adjustment, the total number of CFETS basket currencies will increase from 13 to 24, and the weight of US dollar will decrease from 26.4% to 22.4% of the total basket.

Date

17 Mar 2017

Channel

Treasury

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