Ella 
Pan Gongsheng, the governor of the People’s Bank of China, spoke last night, confirming that they will still maintain an accommodative policy stance, but are unlikely to make major changes. One thing they did mention was that they are considering buying their own government bonds. However, they also said that this would not be what the West calls quantitative easing, but more of a “liquidity management tool.” But no matter how it is interpreted, buying their own government bonds is some form of quantitative easing.
These comments have left the RMB and offshore RMB weak, but the comments from Chinese officials may be the big news. Among other comments, they said they will “resolutely prevent the exchange rate from exceeding the target.”
This comment suggests that they may allow the RMB to depreciate slightly as long as any move is not excessive. When officials give hints about the exchange rate, it is important to pay attention, because they have management power to stop the currency’s trend or allow it to fluctuate sharply. USD/CNH has been in an upward trend for almost 2024, and officials have had the state banks intervene to prevent the RMB from depreciating too much. Now, they may take the brakes off.
For the USD/CNH trend, it has been facing strong resistance around 7.28, so further weakness in the RMB may break through this resistance and rise to 7.30. I have been short USD/CNH since 7.36 but the price action over the past few weeks has me a bit concerned.
Following the comments from Chinese government officials I decided to close out my remaining short position at 7.2759 as I would not go against the tide of what these comments could have. All factors are contributing to the likelihood that USD/CNH could move higher rather than lower and I don’t want to go against the tide.
Whether these comments are valid will be judged by what happens now. One thing to watch right now is the PBOC’s central parity rate which has been stuck at 7.10/7.11 for a few weeks now. If the central parity rate starts to climb it would be a sign that China is indeed letting the RMB move and from that point on we need to see how and how fast it moves.
Comments from the PBOC or state agencies are great for trading the RMB. You won’t find a clearer direction for the currency than China and trading based on these comments can be very cost effective. I am not looking to go long at this point but if conditions warrant, such as a rise in the RMB central parity rate, if it breaks the 7.28 level or if further comments are received that suggest action is coming I might go long.
