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.

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