Insights.abnamro.nl/en

FX Watch

15 December 2015

CNY index implies weaker CNY?

New currency index – a better gauge for external competitiveness

On 11 December, the China Foreign Exchange Trade System (CFETS) – a sub-institution

of the People’s Bank of China (PBoC) - published a Chinese yuan (CNY) index to better

capture the competitiveness of China’s goods and services compared to just using the

bilateral exchange rate of the yuan against the US dollar. The new index give higher

weights to key trading partners, which is called a narrow index, compared to the Bank of

International Settlement (BIS) currency basket.

CNY index weights

Weights

Source: CFETS, BIS

The currency weight is calculated by international trade weight with adjustments of re-

export trade factors. All this signals a shift away in China’s exchange rate policy from a de

facto crawling peg versus the US dollar to a system in which the CNY is managed against

a currency basket. We think that is in itself a logical step, as a peg to the US dollar does

0.00

0.05

0.10

0.15

0.20

0.25

0.30

US

D

EU

R

JPY

HK

D

AU

D

MY

R

RU

B

GB

P

SG

D

TH

B

CA

D

CH

F

NZ

D

CFETS BIS

Group Economics Macro & Financial Markets Research

China has introduced a new currency index…

…to better capture shifts in competitiveness

CNY index has declined by 1.5% this month

We do not think that the weak CNY a one way bet…

…and we see a gradual yuan depreciation policy

Roy Teo

Senior FX Strategist

Tel: +65 6597 8616

roy.teo@sg.abnamro.com

Arjen van Dijkhuizen

Senior Economist

Tel: +31 20 628 8052

arjen.van.dijkhuizen @nl.abnamro.com

2 FX Watch – CNY index implies weaker CNY?– 15 December 2015

not really look optimal for several reasons. First, it may hurt Chinese exports in times

when the US dollar is exceptionally strong, as we have seen this year. Second, with the

CNY now included in the SDR basket, it does not make sense for the yuan to be

exclusively pegged to another component of that same basket.

CNY index has declined since the start of December

According to the new CNY index, the CNY has appreciated by almost 3% from 31

December 2014 to 30 November 2015 against other currencies in the basket. 30

November is the date of the IMF’s formal approval of the inclusion of the CNY in the SDR

basket. Since that day, the CNY index has declined by about 1%, sparking market fears

that the People’s Bank of China (PBoC) is seeking a weaker yuan to inflate and support

the economy.

CNY Index

Index level

Source: CFETS, ABN AMRO

Weak CNY a one way bet?

As highlighted in our EM FX Weekly – PBoC seeking a weaker yuan? Published on 10

December, the large divergence in the offshore and onshore yuan is temporary and likely

to narrow in the coming weeks. The bearish sentiment in the yuan spot and forwards

market is near extreme levels, reflecting market herd behaviour.

CNH divergence with CNY ; 1 week CNH Hibor fixing

CNH-CNY divergence Reverse scale %

Source: Bloomberg

99

100

101

102

103

104

105

106

Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15

CNY Index

2

4

6

8

10-0.15

-0.10

-0.05

0.00

0.05

Aug-15 Sep-15 Oct-15 Dec-15

CNH divergence with CNY (lhs) 1wk CNH Hibor fixing (rhs)

3 FX Watch – CNY index implies weaker CNY?– 15 December 2015

Though the PBoC has signalled that they will allow the exchange rate to be more market

determined, we expect the central bank to punish speculators betting that the depreciation

of the yuan is a one sided bet. Indeed, we suspect that the PBoC has resumed its

intervention activities to defend weakness in the offshore yuan resulting in offshore yields

spiking higher. In addition, the PBoC has fixed the USD/CNY daily rate lower by almost 60

pips on 14 December compared to 11 December closing rate. In our view, this is to signal

that the new CNY index regime does not mean that the central bank is seeking to

aggressively devalue the yuan against the US dollar.

Gradual yuan depreciation policy

Given our view that inflation and export growth in China will gradually improve in 2016 as

the global economy firms and commodity price stabilise, we do not think that the

authorities will steer towards a sharp depreciation. Moreover, a large depreciation in the

yuan is likely to result in an acceleration of capital outflows and negative spill over effects

on other currencies. China’s large foreign exchange reserves and current account surplus

should continue to support the yuan. We expect the CNY to decline to around 6.55 against

the US dollar by the end of 2016, which less pessimistic than what the forward market

(end 2016 6.75) and analyst survey (end 2016 6.60). Based on our 2016 forecasts for

currencies in the CNY index, the CNY index is expected to appreciate next year by

approximately 4% from current levels.

1 year USD/CNH and 1 year USD/CNY NDF

Level

Source: Bloomberg

6.2

6.3

6.4

6.5

6.6

6.7

6.8

Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15

1 year USD/CNH outright 1 year USD/CNY NDF outright

4 FX Watch – CNY index implies weaker CNY?– 15 December 2015

Find out more about Group Economics at: https://insights.abnamro.nl/en/

DISCLAIMER ABN AMRO Bank Gustav Mahlerlaan 10 (visiting address) P.O. Box 283 1000 EA Amsterdam The Netherlands This document has been prepared by ABN AMRO. It is solely intended to provide financial and general information on economics. The information in this document is strictly proprietary and is being supplied to you solely for your information. It may not (in whole or in part) be reproduced, distributed or passed to a third party or used for any other purposes than stated above. This document is informative in nature and does not constitute an offer of securities to the public, nor a solicitation to make such an offer. No reliance may be placed for any purposes whatsoever on the information, opinions, forecasts and assumptions contained in the document or on its completeness, accuracy or fairness. No representation or warranty, express or implied, is given by or on behalf of ABN AMRO, or any of its directors, officers, agents, affiliates, group companies, or employees as to the accuracy or completeness of the information contained in this document and no liability is accepted for any loss, arising, directly or indirectly, from any use of such information. The views and opinions expressed herein may be subject to change at any given time and ABN AMRO is under no obligation to update the information contained in this document after the date thereof. Before investing in any product of ABN AMRO Bank N.V., you should obtain information on various financial and other risks and any possible restrictions that you and your investments activities may encounter under applicable laws and regulations. If, after reading this document, you consider investing in a product, you are advised to discuss such an investment with your relationship manager or personal advisor and check whether the relevant product –considering the risks involved- is appropriate within your investment activities. The value of your investments may fluctuate. Past performance is no guarantee for future returns. ABN AMRO reserves the right to make amendments to this material. © Copyright 2015 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO").