Renminbi rhetoric hits new high

The three-month USD/CNY NDF fell to its lowest level since July 2008, when China repegged renminbi to the US dollar. The market priced in more renminbi appreciation risk on Thursday (April 8), after an article in the New York Times claimed a resumption of renminbi appreciation was imminent. That day, renminbi 12-month NDFs were pricing in 3.09% appreciation over the next 12 months, up from around 2.4% the previous week, although pricing slipped back to 2.94% on Friday.

The article cited sources predicting a renminbi move could easily occur before China's president Hu Jintao arrives in Washington, DC for a nuclear summit to be held today (April 12) and tomorrow.

“The leaking of the policy change might actually delay a renminbi move for now or else risk rewarding speculators,” said Ulrich Leuchtmann, an analyst in Commerzbank in Frankfurt. “Over the weekend, China’s trade balance for March is due to be released and is likely to show China recording its first monthly trade deficit since 2004. China will probably use the data as evidence the renminbi is not as undervalued as commonly thought, thereby justifying only modest appreciation in the currency.”

Others agree the data might undermine the case for renminbi appreciation in the near term by suggesting trade flows are adjusting even though USD/CNY has been stable since mid-2008. “We believe, however, that the significance of such an outcome is somewhat overstated, given it is normal for China’s monthly trade balance to be lower in the first quarter of the year,” said Brian Jackson, senior strategist at RBC Capital Markets in Hong Kong.  

That said, the Canadian dealer expects China will act on the exchange rate not because it seeks to placate international pressure, which is typically focused on China’s trade surplus, but because doing so will be the appropriate policy response to domestic economic conditions. “Officials have made it clear they consider tighter monetary policy will need to be accompanied by a stronger currency to dampen capital inflows attracted by higher interest rates, while currency appreciation should also help to contain price pressures directly via its impact on imported inflation,” said Jackson.

The bank forecasts USD/CNY falling to 6.70 by mid-year and 6.50 by year-end.