FX Viewpoint 10 Dec 2021 | Central bank actions: PBOC, RBA and RBI | Article – HSBC VisionGo

Central bank actions: PBOC, RBA and RBI
Finance  ·    ·  7 mins read

  • Reaching a fresh year-to-date low, USD-RMB bounced after the PBOC’s announcement about banks’ forex measures 
  • The December RBA meeting lifted the AUD, while the December RBI meeting proved to be a let-down for the INR
  • Policy divergence, a growing theme in driving relative FX performance, could be more influential in 2022, in our view

The PBOC announced to cut banks’ RRR for the second time this year

On 6 December, the People Bank of China (PBOC) announced it will implement a broad-based cut in banks’ reserve requirement rate (RRR) of 0.5%, effective from 15 December. This is estimated to release about RMB1.2trn of liquidity into the banking system, although the PBOC said part of the released liquidity will be used to repay the maturing medium-term lending facility (MLF) of RMB950bn on 15 December. The cut, the second this year following a cut of similar scale in July, echoed China Premier Li Keqiang's remarks three days earlier (source: Bloomberg, 3 December 2021). 

Both trade surplus and portfolio inflows supported the RMB, with USD-RMB trading at a year-to-date low

Following the announcement, the RMB strengthened, with USD-RMB trading at a fresh year-to-date low on 9 December. We believe the recent RMB strength was supported by China’s larger trade surplus and more portfolio inflows. Indeed, there are USD8.2bn of Northbound Stock Connect inflows month-to-date, versus a monthly average of USD4.8bn year-to-date (source: Bloomberg, 9 December 2021). 

Yet, the RMB weakened significantly, after the PBOC’s announcement about banks’ forex measures

On 9 December evening, the PBOC announced that the reserve requirement ratio on foreign exchange (forex) deposits in financial institutions will be increased from 7% to 9%, effective from 15 December. This is the second 2 percentage-point hike since 15 June (announced on 31 May), and prior to that, the rate was unchanged for 15 years. The RMB weakened immediately after the announcement. 

The December RBA meeting provided a lift to the AUD, as early QE exit could be on the cards

The AUD gained ground following the Reserve Bank of Australia (RBA) meeting on 7 December, as some small shifts in the statement proved supportive. The meeting was the expected non-event with no change to the policy rate or the pace of bond purchases. Our economists expect QE to be tapered in February 2022 to a AUD1bn a week pace, from AUD4bn currently. The RBA’s observation that market functioning would be an input in deciding on the appropriate pace may open the door to QE ending in February.

Our economists think that the overall RBA’s guidance remained dovish

The AUD may also have benefited from the decision not to include a time-dependent commitment to unchanged rates in the key final paragraph of the statement. Our economists argue that this emphasises the state-dependent nature of the policy, and means should wages pick up faster than expected, rates could be hiked sooner also. Overall, however, the tone of the RBA’s guidance remained dovish. While upbeat on the economic outlook, the inflation narrative was that it would take time for pressures to build. We think yield levels and potential to speed up rate hikes should support the AUD in 2022e.

The INR was variably weaker post RBI, but we expect the INR to recover gradually over time amid improving balance of payments

The INR was slightly weaker following the Reserve Bank of India (RBI)’s decision on 8 December to keep its policy rates unchanged (reverse repo rate at 3.35%, repo rate at 4%), against some expectations of a 20bp hike in the reverse repo rate. The RBI also held on to its accommodative stance for "as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy". Yet, this need not hold back the INR from gradually recovering over time, amid supportive trends from India’s balance of payments.

Policy divergence will likely become more influential in the FX market in 2022, in our view

In our view, policy divergence has been a growing theme in driving relative FX performance in recent months and, while this has been less noticeable for some currencies like the RMB, the INR could face some near-term hurdles with the central bank being seen as a laggard. Looking into 2022, we believe this theme will likely become more dominant in the FX market.

Disclosure appendix

This document is for information purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Information in this document is general and should not be construed as investment advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on it, consider the appropriateness of the information, having regard to their objectives, financial situation and needs and, if necessary, seek professional investment and tax advice.
Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of the investment products mentioned in this document and take into account their specific investment objectives, financial situation or particular needs before making a commitment to purchase investment products. 
The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Value and income from investment products may be adversely affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative of future results.
HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of companies covered here on a principal or agency basis.
Whether, or in what time frame, an update of this information will be published is not determined in advance.
Additional disclosures
1. This report is dated as at 10 December 2021.
2. All market data included in this report are dated as at close 09 December 2021, unless a different date and/or a specific time of day is indicated in the report.
3. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.
4. You are not permitted to use, for reference, any data in this document for the purpose of (i) determining the interest payable, or other sums due, under loan agreements or under other financial contracts or instruments, (ii) determining the price at which a financial instrument may be bought or sold or traded or redeemed, or the value of a financial instrument, and/or (iii) measuring the performance of a financial instrument or of an investment fund.


This document is prepared by The Hongkong and Shanghai Banking Corporation Limited (‘HBAP’), 1 Queen’s Road Central, Hong Kong. HBAP is incorporated in Hong Kong. This document is for general circulation and information purposes only. This document is not prepared with any particular customers or purposes in mind and does not take into account any investment objectives, financial situation or personal circumstances or needs of any particular customer. HBAP has prepared this document based on publicly available information at the time of preparation from sources it believes to be reliable but it has not independently verified such information. The contents of this document are subject to change without notice.
This document is not investment advice or recommendation nor is it intended to sell investments or services or solicit purchases or subscriptions for them. You SHOULD NOT use or rely on this document in making any investment decision or decision to buy or sell currency. HBAP is not responsible for such use or reliance by you. You SHOULD consult your professional advisor in your jurisdiction if you have any questions regarding the contents of this document.
You SHOULD NOT reproduce or further distribute the contents of this document to any person or entity, whether in whole or in part, for any purpose. This document may not be distributed to the US, Canada or Australia or any other jurisdiction where its distribution is unlawful.
Hong Kong
In Hong Kong, this document is distributed by HBAP to its customers for general reference only. HBAP is not responsible for any loss, damage or other consequences of any kind that you may incur or suffer as a result of, arising from or relating to your use or reliance of this document. HBAP gives no guarantee, representation or warranty as to the accuracy, timeliness or completeness of this document.
Notwithstanding this document is not investment advice, please be aware of the following for the sake of completeness. Past performance is not an indication of future performance. The value of any investment or income may go down as well as up and you may not get back the full amount invested. When an investment is denominated in a currency other than the local currency of an investor, changes in the exchange rates may have an adverse effect on the value, price or income of that investment. Where there is no recognised market for an investment, it may be difficult for an investor to sell the investment or to obtain reliable information about its value or the extent of the risk associated with it.
This document contains forward-looking statements which are, by their nature, subject to significant risks and uncertainties. Such statements are projections, do not represent any one investment and are used for illustration purpose only. Customers are reminded that there can be no assurance that economic conditions described herein will remain in the future. Actual results may differ materially from the forecasts/estimates. No assurance is given that those expectations reflected in those forward-looking statements will prove to have been correct or come to fruition, and you are cautioned not to place undue reliance on such statements. No obligation is undertaken to publicly update or revise any forward-looking statements contained in this document or any other related document whether as a result of new information, future events or otherwise.
The Hongkong and Shanghai Banking Corporation Limited, its affiliates and associates and their respective officers and/or employees, may have interests in any products referred to in this document by acting in various roles including as distributor, holder of principal positions, adviser or lender. The Hongkong and Shanghai Banking Corporation Limited, its affiliates and associates, and their respective officers and employees, may receive fees, brokerage or commissions for acting in those capacities. In addition, The Hongkong and Shanghai Banking Corporation Limited, its affiliates and associates, and their respective officers and/or employees, may buy or sell products as principal or agent and may effect transactions which are not consistent with the information set out in this document.
© Copyright 2021. The Hongkong and Shanghai Banking Corporation Limited, ALL RIGHTS RESERVED. No part of this document may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited.