Goldman Spots Odd “Asymmetry” In Chinese Yuan Fixing As Outflows Accelerate
By Tyler Durden – Zero Hedge
Starting in early June, when Goldman’s FX team unveiled the Yuan doom loop…
… the bank has been esecially bearish on the Chinese currency, a trade reco with which the investment bank has been surprisingly on the money.
And with Chinese FX data which is expected to show an acceleration in capital outflows on deck, the market’s attention will be increasingly more focused on the Yuan. Which brings us to the latest note by Goldman’s FX team, in which we find that Robin Brooks et al appears to have discovered a curious “asymmetry.”
Here is Goldman’s explanation of what it uncovered:
We have spent recent weeks modeling the fixing mechanism for $/CNY. In the process, we uncovered meaningful asymmetry, meaning that the RMB does not reverse declines made on Dollar strength when the Dollar weakens. This episode of Dollar weakness is a case in point, with the CFETS basket resuming its fall after a period of stability (Exhibit 4). Even beyond the trade-weighted decline in the RMB, we have argued that a rising USD makes things difficult for China, because it means that $/CNY has to fix higher (Exhibit 5), which carries the risk of accelerating capital flight. Hedging costs for RMB downside have pulled back, offering a compelling entry point should Dollar strength resume on a Clinton win.
And some more details:
We often encounter the view that the RMB is asymmetric, by which people mean that the currency weakens when the Dollar appreciates, but doesn’t commensurately strengthen when the greenback weakens. Intuitively, the fact that the CFETS basket has fallen around 10 percent while the Dollar has been stuck in a range means that this is true almost by definition. This FX Views test for this asymmetry evaluates how severe it is currently, and tracks how it has evolved over time. We find that the response in $/CNY fixings became asymmetric in the direction of RMB weaker from March of this year, but has shown signs of abating recently. In a way, our results are statistical proof of a “bias to depreciate,” which we see as supportive of our shift to a more bearish RMB view this summer, after being more-constructive-than-consensus early this year. We continue to think that hedging RMB weakness is attractive, even with forwards moving to price a bit more depreciation.
Finally, in light of the recent exposure of Chinese capital flight which as calculated by GS was some 3 times greater than the official number, Barclays expects a significant drop in FX reserve when the latest official Chinese FX reserve number is announced shortly, confirming that China’s capital flight is accelerating notably.
USDCNY came close to breaching 6.80 on USD strength. We think the pullback will be short lived and, as likely to be revealed in FX reserves data over coming days, capital outflows will put further pressure on the CNY. Much will depend on the USD, but assuming that the USD continues to appreciate in the months ahead, China’s referencing of the CNY NEER basket implies more potential upside for USDCNY and USDCNH
A reminder of what China’s FX reserves look like: