Forex Flash: More on China´s bid to widen the USD/CNY trading band - DBS Group

FXstreet.com (Barcelona) - DBS Group analysts note that Yi Gang, Vice Governor of the People’s Bank of China (PBoC), said last week that the authority is planning to widen the RMB’s trading band in the near future to better reflect market forces.

They note that the bank doubled the trading band last April to 1% either side of the daily reference rate and further widening will grant policymakers greater flexibility in currency matters amid uncertain capital flows, triggered by worldwide QE. They note that the RMB hit a new high against the USD last week and has frequently traded close to the strong side of the band, indicating the market’s expectation for further appreciation. They write, “A broadened band, however, may not simply herald a faster RMB appreciation since the PBoC can always limit the currency movement via intraday market intervention and daily fixing. After all, Yi’s comment is a clear indication that Beijing will press ahead with market-oriented reform despite the surprise slowing of the economy.” They feel that against the backdrop of RMB internationalization, Beijing has to loosen its grip on the country’s capital account. They believe that the RMB’s trading band must hence be widened gradually as international experience indicates that capital account openness does not reconcile well with a rigid exchange rate mechanism.