Renminbi Falls Near Limit Low 6 out of 7 Days

The yuan fell near its lower limit in 6 of the past 7 trading days. Worries about the yuan are increasing, but one reason not to expect a big drop——politics. The Americans won't like it.

Bank of Communications chief economist Lian Ping believes that the current devaluation greater pressure, but the RMB exchange rate has been close to the equilibrium price, soared large devaluation are inappropriate. In addition, the RMB exchange rate but also by the trade surplus is too large constraints. "If the sharp depreciation of the renminbi, the US will not agree." Lian Ping said.

Zong also believes that the US dollar against the world's major currencies, will inevitably lead to an adverse impact on US exports, triggering the views of the American people. US Secretary of the Treasury on January 23 made it clear that "China's exchange rate worries continued to increase" at the Davos forum. "In this case, even if the renminbi is very difficult to want to depreciate too much, not to break the minimum 6.4." Zong said.

Lian Ping expects substantial appreciation of the yuan in 2015 can not be sustained devaluation impossible. Spot exchange rate in 2014 will continue the trend, trading range may be from 6 to 6.4.

There's 6.4 again.

Due to sharp decline for seven consecutive days, the RMB exchange rate recently quickly catapulted high click-through rate of network hot words, the public expressed a great deal of attention.

"More worrying than the devaluation itself is the widespread appearance of devaluation expectations." Xie YaXuan said.

At least so far, these expectations of depreciation haven't spread to the general public (see chart below).

The PBOC has a public image problem, courtesy of the U.S. Treasury Department. On the one hand, the PBOC wants to let the market play a greater role and the Treasury agrees (because they think the yuan will appreciate). On the other hand, it doesn't want to be accused of devaluing the yuan. The PBOC can't intervene to defend the yuan and at the same time claim the market is devaluing it if it drops, since this only reinforces the argument that the PBOC is controlling the market. The PBOC also doesn't want to be hands off and let the yuan experience a serious devaluation. The end result is a lack of clarity in the market.

"More floating yuan central parity, will increase the volatility of the spot rate, the impact of market supply and demand on the exchange rate is more significant." Xie YaXuan said, "The purpose is to reduce the central bank intervention, should not be interpreted as 'hands-off', and also should not be simply believe its an intentional RMB exchange rate 'devaluation'. "

Zong said that since last year, the central bank to gradually withdraw from the normalization of the RMB exchange rate intervention, the RMB exchange rate closer and closer to 2% maximum amplitude, is the central bank intends to allow the market to adapt to such fluctuations. One thing you can be sure of, big RMB exchange rate fluctuations will be relatively normal in the future.

Greater fluctuation is coming due to the PBOC's desire to internationalize the yuan and allow the market a greater role. Yet many in the market still believe the PBOC will not allow a serious devaluation, and even those who think the yuan could drop, typically cite 6.40 as a line in the sand. The euro and yen have declined by a greater percentage in less than two days of trading.

A big drop in the yuan is still a small outside possibility, but as long as devaluation expectations are expressed in the offshore yuan, China could experience continuous U.S. dollar outflows. If the PBOC fights the market, it will have to pay to do so. If it accedes to the market, it may fear political reprisals from the U.S. or simply further losses should traders see the PBOC giving way to market forces.

There's already a template for devaluation from the past because the RMB should have devalued in 2008. The PBOC has hidden deprecation pressure in the past by refusing to move the fixing. When the market repeatedly hits limit down, it is trying to take the market lower, but the PBOC refuses to budge. In 2008, the pressure was so great that the PBOC re-pegged to the U.S. dollar and didn't let up until 2010. Appreciation started again from a higher level than it otherwise would have.

Today, the offshore yuan market is larger, capital controls less stringent and perhaps more porous. The U.S. dollar is as strong, and maybe even stronger than it was in 2008 if this is the start of a bull cycle instead of just the end of the bear cycle in 2008. China is at the end of a credit cycle and the economy is slowing rapidly (for China). The devaluations in 2011, 2012 and 2014 lasted for days amid a general RMB appreciation. Despite those moves last for days, forex reserves declined around the same time. Those moves were also led by the offshore market. What happens to reserves if there's devaluation pressure for weeks or months?

As for expecations, I searched the Baidu Index site (similar to Google Trends) for renminbi devaluation and the biggest spike was in 2011, when the RMB saw its first significant move lower. It spiked again in early 2014, but as of right now, it is barely registering an uptick. On the long-term chart, but the percentage gains on previous search volume are very large. This chart below shows a similar trend, but with a more popular phrase: renminbi exchange rate. In terms of public interest, this round of depreciation still hasn't generated as much interest. The intensity of the interest is greater due to the overall economic conditions in China and the coincident indicators such as plunging foreign currencies.