2016: No RMB devaluation, Beijing will use a ‘managed float’

Consensus said:

Large speculative positions for a repeat of the August 2015 RMB step devaluation. 

We said:

Although speculators were wrong to anticipate a sudden devaluation, they were not wrong in noticing that the RMB is overvalued. Despite slowing dollar demand from corporates and tight capital controls, net capital flows are still negative. The government has no desire to protect an overvalued currency because such an approach is expensive and hampers its ability to implement monetary policy. But at the same time it is keen to preserve stability. For this reason, we believe the authorities will continue to use a “managed float” approach, gradually guiding the currency down towards the market level but allowing occasional volatility to inflict pain on speculators. (China 11 April 2016)

Outcome:

USD/CNY weakened from 6.46 on date of publication to 6.96 on 3rd January 2017.

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