- The central bank is starting to loosen the fixed dollar-Yuan rate due to a strong Yuan basket
- If the dollar continues to strengthen, the central bank will have to let the fix gradually increase
- Other Asian central banks are also likely to intervene in the FX market
- The PBOC has tools to manage offshore liquidity and merge CN1 and CNX to control the Yuan's value

China’s second attempt in a month to loosen its grip on the yuan is opening up the door for the currency to test the psychological 7.30 level against the US dollar. Stephen Chiu, chief Asia FX and rates strategist at Bloomberg Intelligence, speaks on Bloomberg Television. 
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Tell us about the fixing patterns that we're hearing from the central bank.

I mean, as you say, it's a strong dollar story.

So China has been keeping dollar-Yuan fixed very stable, but now they're starting to loosen it, for example, yesterday.

I think it's obvious because the Yuan basket is so strong.

If you look at the fix, the Yuan basket is over 100 already.

If you look at CNX, the basket is over 99.

So that's why they will have to let it go a little bit, a little bit, time by time, as Stephen has said earlier.

It really depends on how long this dollar strength can last.

If it keeps strong, then basically the people, there's no choice.

They just have to let the fix into grind higher, gradually.

You know, you have green tie, you have green glasses, green back, okay?

But again, how fast is too fast of weakening?

Yeah, Thank you for noticing this green back thing for today.

Because if you look at the fix at 7.1, so now that gives you a sort of upper band at 7.25 below that.

So probably now that's the red line for PBOC.

But 7.3 eventually will be hit once the dollar strengthens further.

We talk about all these superlatives for Asia FX.

How do you think, are we likely to see more sort of central banks have to step in and do something now?

We have actually, not yesterday, saying that this quarter is actually the key theme is watch out the Asian central banks.

They're gonna have to intervene verbally like even actively.

Yesterday as mentioned Bank of Korea made this very rare comment and then Bank Indonesia intervene which is not often actually and then like this morning like we heard from Japan, heard from Korea talking about the currencies.

And if you look at the levels it's also very interesting.

The ring get 4.8 is the level that they care about.

And then also like Taiwan dollar 30 32 50 is what CBC care about last year.

So now they would just have to be watching the FX market very carefully and we will have to watch out for news that central banks are in the market.

We're watching obviously waiting for the fixing and the yuan.

What other further tools does the PBOC have though?

I think as you mentioned like the offshore liquidity CNX liquidity has started to sort of spike up a little bit.

So again that's 1 of the 2 that's most effective, despite probably just for a short period of time.

That could squeeze CNX shorts and merge the CN1 and CNX.

But eventually, again, if the greenback stays strong, then it's very hard for them to hold the drain back.


Speaker 0: Tell us about the fixing patterns that we're hearing from the central bank.

Speaker 1: I mean, as you say, it's a strong dollar story. So China has been keeping dollar-Yuan fixed very stable, but now they're starting to loosen it, for example, yesterday. I think it's obvious because the Yuan basket is so strong. If you look at the fix, the Yuan basket is over 100 already. If you look at CNX, the basket is over 99.

So that's why they will have to let it go a little bit, a little bit, time by time, as Stephen has said earlier. It really depends on how long this dollar strength can last. If it keeps strong, then basically the people, there's no choice. They just have to let the fix into grind higher, gradually.

Speaker 0: Gradually is the key, right, Steven? You know, you have green tie, you have green glasses, green back, okay?

Speaker 2: But again, how fast is too fast of weakening?

Speaker 1: Yeah, Thank you for noticing this green back thing for today. Yeah, so Yvonne pointed out 7.3. I totally agree with that. Because if you look at the fix at 7.1, so now that gives you a sort of upper band at 7.25 below that. So probably now that's the red line for PBOC.

But 7.3 eventually will be hit once the dollar strengthens further.

Speaker 0: I mean it's not just the RMB, right? We talk about all these superlatives for Asia FX. How do you think, are we likely to see more sort of central banks have to step in and do something now?

Speaker 1: Absolutely. We have actually, not yesterday, saying that this quarter is actually the key theme is watch out the Asian central banks. They're gonna have to intervene verbally like even actively. Yesterday as mentioned Bank of Korea made this very rare comment and then Bank Indonesia intervene which is not often actually and then like this morning like we heard from Japan, heard from Korea talking about the currencies. And if you look at the levels it's also very interesting.

The ring get 4.8 is the level that they care about. And then also like Taiwan dollar 30 32 50 is what CBC care about last year. So now they would just have to be watching the FX market very carefully and we will have to watch out for news that central banks are in the market.

Speaker 2: We're watching obviously waiting for the fixing and the yuan. What other further tools does the PBOC have though?

Speaker 1: I think as you mentioned like the offshore liquidity CNX liquidity has started to sort of spike up a little bit. So again that's 1 of the 2 that's most effective, despite probably just for a short period of time. That could squeeze CNX shorts and merge the CN1 and CNX. That can work a little bit for a while. But eventually, again, if the greenback stays strong, then it's very hard for them to hold the drain back.

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China Moves to Loosen Yuan-Dollar Fixing to Test 7.3 Level