We see increased signs that policymakers will be more open to modest RMB depreciation. We first signalled this in a Dec-18 EMgist Live post (), citing that a policy shift from quantity of growth to quality of growth is by design, dilutive to growth. Expectations of slower, more sustainable growth in turn would encourage officials to seek other sources of growth - namely export markets, which would be assisted by a more competitive (weaker) RMB. Officials have the policy flexibility to pursue this strategy while FX reserves have stopped falling and domestic interest rates are high - both of which have improved sentiment around the RMB. Externally, now that the US tax stimulus and the Dec Fed hike are out of the way, the consensus view that USD appreciation will not be as disruptive as initially feared also provides a conducive backdrop for such a policy shift.
What removing the 'CCF' tells us
In our view, the removal of the 'counter-cyclical factor' (CCF) in determining the PBOC RMB fix (9 Jan-18) reinforces officials':
1/ Potential aversion to excessive RMB strength (eg USD-CNY breaking below 6.50)
2/ Potential openness to a stable-to-weaker RMB as a source of growth
3/ Confidence that the govt will maintain control over the FX narrative and
4/ Further out, policy support for increased market determination of the exchange rate over time.
Trade idea: Long SGD-CNH
We express this trade via long SGD-CNH given: 1/ Similar underlying basket constituents, 2/ SGD trading on the rich side of the NEER band (likely to stay here pre-MAS April meeting). An implicit RMB depreciation policy means that CNH should underperform the SGD, particularly during periods of modest USD depreciation.
Risks to view: USD appreciates near-term, which pressures the RMB to weaken, but typically not enough vs the SGD (RMB outperforms).
Tactical entry points: 1/ Amid signs of weaker growth (especially exports), 2/ If RMB sentiment is positive (eg if the CNY-CNH cross is <0 or if both spot rates trade stronger to the fix) or 3/ USD is set to depreciate modestly.
Time horizon: We expect to maintain this view through the National People's Congress (Mar-2018) when the policy shift towards a more sustainable growth model/trajectory is codified in lower official 2018 GDP/credit growth targets.
Visual: Top = USD-SGD (red, inverted), USD-CNH (yellow, inverted)
Bottom = SGD-CNH cross (black), Bloomberg RMB CFETS estimate (blue, inverted)