This post is taken from our August 7th weekly report.

USDCNH breached the 6.90 mark last week, having been under 6.30 just four months ago. This 10% depreciation has come against a backdrop of slowing Chinese growth and escalating US trade tensions. Although there remains enormous uncertainty over the trade war (last week China retaliated on $60bn of US imports after president Trump threatened to raise tariffs to 25% from 10% on $200bn of Chinese imports), the CNH depreciation creates opportunities against other FX pairs. The CNY basket and CNHKRW are both back trading at major support levels.

The PBoC remains in control over the current episode of RMB devaluation. Capital outflows have stabilised since the start of 2017 and FX reserves have risen even after stripping out the valuation effects of the weaker USD we saw in 2017 (bottom-right chart). The bottom-left chart shows that Chinese money markets are also showing minimal stress at the moment as funding pressures remain limited given the lack of capital outflows. This past Friday, the PBoC reinstated a 20% reserve requirement on banks’ foreign-exchange forward contracts that was last in place from 2015 to 2017. This should be the catalyst for a squeeze higher in CNH. Given CNHKRW has traded back to major support that has held 5 times since 2011, its risk-reward is attractive.

(Click on image to enlarge.)

Source: Bloomberg, Macrobond and Variant Perception