USD/CNY: China is adopting an enlightened 'crisis mode' FX policy – HSBC

The underperformance of the CNY against the basket of currencies is driven by a combination of stronger USD demand from importers and locals, and a temporary weaker CNY demand from foreigners, in the opinion of economists at HSBC Bank.

Key quotes

“Allowing flexibility in USD/CNY but also keeping CNY overvaluation in check is feasible as long as the EUR/USD holds its range around 1.10, in our view.”

“The CNY’s effective appreciation has slowed, probably due to importers’ USD purchases, financial flows and the recent PBOC’s monetary easing.”

“If the USD is soft in the near-term, USD/CNY may drop below 7.0 sooner rather than later. But a two-way FX market is likely to be the new normal, as it best serves China’s current macro-economic conditions.”