Does China Want RMB to Breach 7.0? It Spent Less in Forex Sales in October

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While the People’s Bank of China—the Chinese Central Bank—spent RMB 91.58 billion on forex sales in October, the amount was 23% lower than the RMB 119.39 billion in September.

At the same time, the RMB depreciation hit 1.56% in October, compared with 0.55% a month ago.

It seems the central bank is allowing the RMB to be more responsive to news, data and ad hoc information, according to Iris Pang, Greater China economist at ING.

“The central bank could be intervening with a target,” she said. “This is more interesting because the market then wants to know what the 'target' is. Is USD/CNY at 7.0 a target or is there a line below that?

The central bank could be targeting small ranges that would lead USD/CNY to cross 7.0, Pang noted.

“For example, 6.91- 6.95 might be a target range for a certain period, then a weaker RMB range of 6.95 - 7.00 for later, so that eventually, USD/CNY crosses 7.0 without surprising the market,” she said. “Therefore, we don't agree that the People's Bank of China won't allow USD/CNY to cross the 7.0 handle.”

According to her, USD/CNY will depreciate when trade war tension escalates, and crossing 7.0 looks increasingly likely.

“The central bank is more likely to be managing market sentiment by making sure the exchange rate doesn't surprise the market,” Pang said. “The scale of interventions will become smaller as the exchange rate approaches 7.0 so that foreign exchange reserves only fall mildly.”

For now, ING maintains its forecast at 7.0 by the end of this year, she noted.