Yuan Implied Volatility Spikes To 2-Year High As PBOC Widens Trading Bans (Slows Carry Trade)

Tyler Durden's picture

While Goldman is quickly down-playing the decision by the PBOC to double the size of the daily trading bands for USDCNY to +/2.0% as a risk-off event (just as it was in 2012 - but blame that on Greece as cause rather than symptom), BofA is a little less sanguine about the move noting a more volatile CNY/USD without trend appreciation will deter hot money inflow and perhaps will result in some unwinding of previous inflow. With 1-month volatility spiking to over 4% (its highest in over 2 years), the move is sure to remove some carry traders as risk-rewards break down on their leveraged positions.


Implied volatility is dramatically higher (i.e. the market is pricing in expectations of more volatility going forward) which reduces the risk-reward characteristics of the carry trade and thus removes many players (or at best merely reduces their leverage)...


Via BofAML,

The PBoC widens CNY/USD daily trading band to +/-2.0%

The PBoC on 15 March announced to widen the yuan-dollar (CNY/USD) daily trading band to +/-2.0% from +/-1.0%, effective from 17 March. The previous band widened took effect on 16 April 2012 when the band was widened from +/-0.5% to +/-1.0%.


This should not be a big surprise to the markets as the PBoC has made it clear recently that it would widen the band this year. Perhaps the timing of this band widening is slightly ahead of what markets had expected.

What's the most important message? 

The band widening strengthens the PBoC's signal that the one-way bet on CNY gain is over, and we should expect more CNY/USD volatility going forward. In the PBOC's own words, two-way yuan fluctuation will become the norm. In the past month we have observed falling interbank rates and falling CNY/USD in China. We believe these moves were engineered and coordinated by the PBoC to solve the dilemma (rising rates, rising hot money inflow and rising CNY) it was facing in 2013. 

Where can the CNY/USD exchange rate go? 

Chinese policymakers and academia have reached the consensus that the current USD/CNY (spot rate was 6.15 as of 14 March) is very close to its equilibrium level, so perhaps we will see neither trend appreciation nor trend depreciation in the near term. In the medium to long term, the equilibrium value of CNY/USD will be determined by a number of factors including money supply and inflation in China and the US.

What's next step regarding China's FX regime reform? 

We believe the PBoC won't stop here, but further band widening is of little meaning. A much more important and meaningful reform is to change the mechanism on setting the daily fixing of CNY/USD. In our view, China will eventually shift to a market-based FX regime. As an intermediate step, China could peg yuan to a basket of currencies weighted by the importance of its trading partners. More specifically, the Singapore's BBC (Basket, Band and Crawl) regime seems to be favored. A reform towards a real managed float such as the "BBC" system requires a group of more confident and pragmatic political leaders who are true believers of markets. We think the time is ripe as the current leaders, who consolidated their power base at a much faster pace than expected in 2013, are market oriented.

What's the impact on capital flow and growth? What's the impact on money flow and the economy? 

In our view, a more volatile CNY/USD without trend appreciation will deter hot money inflow and perhaps will result in some unwinding of previous inflow. However, it should not be a big worry as China's has a massive US$4.0tn FX reserves, 20% reserve requirement ratio (RRR) and only 67% loan-to-deposit ratio. If capital outflow risks the stability of interbank liquidity and base money supply, the PBoC has a big room to inject liquidity by cutting RRR or purchasing government bonds. So the only thing we need here is a more flexible PBoC which closely monitors interbank liquidity and interbank rates. Chinese exporters will overall benefit from the band widening which sends strong signal of the end of one-way appreciation of CNY/USD. Note last year CNY appreciated around 6% against its basket, putting big pressure on Chinese exporters.

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kaiserhoff's picture

Now if the fucking Fed would do that for interest rates,

we could get this show on the road.

Seize Mars's picture

Sorry I think the headline should have been "widends trading bands," right?


0b1knob's picture

And the ban played on as the Titanic slid beneath the waves.

The Vineyard's picture

ZeroHedge has been predicting the fall of China since Chairman Mao was the fearless leader.  What a bunch of shit.  Bitches.

zionhead's picture

It's called 'sore losers' at team goldman sacks.

TideFighter's picture

Yeah, then we could see the billion spot on the debt clock click off in seconds....

disabledvet's picture

the sentiment is appreciated. "just sentiment" however.
I agree with those at the hedge who imply that this is a "Great Depression" (liquidity trap...absolutely true in Europe now...and has been true in Japan going on three decades now.)

"An intervention by the Crazy KGB Colonel into Ukraine will lock everyone into their respective policies" however.

In short "QEternity" indeed. I'm not sure how low these rates can go (clearly issuance of Treasuries is about to surge...perhaps dramatically)...what I can say is "we are not directly in the path of this particular Russian war machine." (unlike the last one...where the "boundaries" were determined by the Generals in the field.)

That would be Europe, Scandanavia, Japan and China...at least for now.
It is ironic that this Administration which has gone out of its way to say it wants inflation (certainly the dollar collapsed in 2009-2010) to end up getting a "super dollar" instead.

But that is exactly what happened last year.
That does leave room for a gold standard...STILL..."kaiserhoff."
"there is a lot of open space to the East" indeed.
Since no one denies the RIGHT of "collective self defense"...i guess we'll just have to see how the team does here.

here is the vehicle that squad travels in:

most of these machines are in storage now since they are beyond the capability of any nation on earth and "need to be held in reserve because they are hardened and can work in nuclear, chemical and biological weapon environments."

Here is an entirely new platform for that squad that "like disabledvet has been killed many times."

That thing weighs 80 TONS and is not considered a even a tank!
VERY impressive in disabledvet's world.

here is the first contract to get "uncancelled" because of "Crimea."

The incentive..and actual actions both on the ground and in diplomatic circles remains "escalation." I don't think President Putin can stand down from going into to Kiev now...and I don't think the West can shirk the responsibility of defending it either.

Should the requisite agreements be reached by the principles (Europe, the USA and Scandanavia) then I think the "collision course will be set."

In other words "there is no off ramp here."
The question to me isn't "what does Putin do once he ramps up" but "what does the West do once they?" To me if the West agrees "this aggression cannot stand" then clearly the goal is Moscow itself.

kliguy38's picture

that'll leave a mark......that door is getting smaller and smaller sheeple

buzzsaw99's picture

Nice free market they got. [/sarc.]

kaiserhoff's picture

Yeah, until they get a handle on the endemic corruption, I'm not sure the lipstick matters.  I don't know how you do that.  Maybe they could ask Mexico;)

buzzsaw99's picture

Well, the free market went from 1% to 2% wiggle room so maybe that's progress? Next millenium maybe 3%?

Hindenburg...Oh Man's picture

I'm glad to see that gold popped to 1392 on the open but then was summarily beaten back down to 1381. Will be interesting to see how it's doing when I wake up. I wish that the futures wouldn't open until 9 am...it's always this way; get excited by a huge pop at the start and then the smack down starts within the next few hours. Negative spring-boarding in effect. 

zionhead's picture

Another way to look about GOLD is buy all you can while its cheap, cuz WAR is on the horizon, ... and GOLD will go up.

Too much disinformation, but all the BULLSHIT is going to converge, once people start seeing the big picture.

BandGap's picture

I think they told the US they have ample FX reserves so they are going to QE, Manchurian style.


AccreditedEYE's picture

Hmmm Goldman or BofA.... Who to believe? Hard choice... Who runs the world again? (This is not hard)

X_mloclaM's picture

Chinese exporters who neither import, or are economically isolated from the second order benefits of cheaper imports, will overall benefit from the band widening which sends strong signal of the end of one-way appreciation of CNY/USD.

GooseShtepping Moron's picture

I'm guessing China wants to sell some of its US Treasury reserves without having its currency gap-upping every day. It's a pretty shrewd move, actually; they'll be able to liquidate their dollar position and still dump their exports on us, and it looks like their going to get away with it.

Ascew's picture

Anyone have any thoughts on the timing of this move? Could this change, at this specific time, be a subtle way of the Chinese making a statement on Crimea?

zionhead's picture

China TV is all reporting that the missing plane is Kazahkstan in a CIA hangar.

CHINA troops to be activated to KAZAHKSTAN to free the hostages.

Why is CNN, and all western media telling another story?


ZH has been bashing CHINA for months, an Chinese are being killed left & right by CIA terrorists.

Where is the CIA taking us?

How long before China gets pissed and provoked to HIT the CIA Back?

MollyHacker's picture

Nuts, it's gettin' hard to make the old dog (china) to heel.