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Forex Flash: USD/CNY fix: Politics or economics driving the fix today? - Nomura

Nomura economists Craig Chan and Prashant Pande have taken a look at the USD/CNY fix and wonder what is the driving force, politics or economics.

They note that the USD/CNY fix today surprised on the downside, dropping 105 pips to 6.7930. This was the largest single-day move since 15 October 2012, which occurred a day before the second US presidential debate. One could argue that the RMB last fixed substantially lower when President Obama was under pressure to perform in the second round debate, which was on "foreign and domestic issues", and was "aided" by a string of lower fixes (the fixings fell by 421 pips in five sessions).

They also feel that international politics could also be a factor for the significantly lower fix yesterday, given the G20 finance ministers meeting on 15-16 February (Moscow). Yen depreciation could also be a factor and China´s move could imply it intends to put pressure on Japan to avoid Yen depreciation. They write, “Today´s fix takes the year-to-date change in fixings to -10bp and today was the last fix before the Chinese New Year (the next coming on 18 February). We also note that China will have a greater capacity to discuss Yen depreciation as, today´s lower fix aside, China has arguably been capping the upside – since the start of the year our model has predicted the USD/CNY fix to be 397pips higher to 6.3252 but in reality it is 62 pips lower.”

Beyond political factors, they feel that upcoming economic data could have led to the lower fix today. Data releases over the next few days include CPI and total social financing (expected next week). Today‟s January exports data were stronger than expected, at 25% y-o-y (Consensus: 17.5%). They note that, ahead of the strong December trade data release on 10 January 2013, the USD/CNY fix was 72 pips below our model prediction.

They finish by writing, “Our short USD/CNY recommendation (USD10mn, entry 8 Jan 2013) fixed today, and although the lower fix today may increase expectations of further CNY appreciation after the New Year holidays, we refrain from re-establishing this position. Risks remain that this could just be a one-time lower fix and the trend of JPY weakness may continue and hamper the downside in USD/CNY after the meeting of G20 finance ministers.”

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