FX policy to support broad RMB stability

In line with reforms being promoted.

It has been noted that the RMB faces two forces: cyclical and structural.

According to a research note from HSBC Global Research, on a cyclical front, policy makers are easing monetary policy to support growth. While lower interest rates are often associated with currency weakness, this should be somewhat less the case for the RMB.

Meanwhile, on a structural front, authorities are promoting reforms aimed at improving the quality of growth and internationalising the currency.

In order to achieve these goals more easily, FX policy will be used to support broad RMB stability, which will help it to outperform on a relative basis.

The impact of monetary easing is more likely to be felt through flatter FX forwards curves, especially as China’s financial markets become more open and liberalised.

Here's more from HSBC Global Research:

The current calming of the USD bull-run is creating balanced flow pressures for the RMB, making both cyclical easing and structural reform more palatable in the near term.

But even outside of this, we believe it is also in China's interest to front-load monetary easing and financial reforms, given the rapid deceleration in growth and inflation and with the IMF’s review of its Special Drawing Rights basket scheduled to take place in Q4.

Taking into account the recent USD consolidation and China's FX policy bias for currency stability, we revise our year-end USD-RMB forecast to 6.26 and 6.32 for 2015 and 2016 respectively, from 6.34 and 6.44.

Medium-term stability in the value of a currency is a separate concept from day-to-day flexibility in the exchange rate, which is a given amid freer cross-border capital flows.

We should expect periodical appreciation and depreciation in the RMB as the capital account is liberalised.