The renminbi is likely to appreciate at best by 1% this year against USD and we would expect to see elevated CNH implied volatility persist.
FX flows are biased towards RMB strength. But going forward we will see:
1) further bouts of RMB volatility and
2) less RMB appreciation.
This combination will come with the widening of the RMB band to reinforce the view that RMB is not a free lunch for those in search of low volatility carry trades.
The PBOC’s recent actions were not just a desire to burn speculators but also a change of strategy on how the RMB will trade going forward. That strategy will make RMB less attractive for carry trades. Sharply lower money market rates also fit into this strategy of reducing perceived and actual returns.
A sharp increase in FX reserves reinforces the idea that flows will remain RMB positive, but the PBOC wants to reduce/eliminate the speculative element. Making the RMB unattractive is the answer, an idea which also fits into its wider goals of deleveraging the financial sector.
Attempting this via higher money markets rates only encouraged the misallocation risks due to stronger inflows and an increase in returns offered on products such as WMPs.
