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CNY set to become fifth currency of SDR basket – Westpac

FXStreet (Delhi) – Richard Franulovich, Research Analyst at Westpac, suggests that following recent reforms and progress toward internationalising the CNY a loose consensus has formed that the CNY will become the fifth currency in the SDR basket when the IMF conducts its five-yearly review in early November.

Key Quotes

“President Obama threw conditional support for CNY inclusion last month. Reports that CNY trading hours will be extended from 4.30pm to 11.30pm local time and the narrowing of the CNY/CNH spread, both of which explicitly address some of the operational issues highlighted by the IMF, add to the impression in favour of SDR inclusion.”

“A late June Bloomberg survey found a majority of analysts (11 of 16) thought the IMF would rule in favour of CNY inclusion this November, though a number of policy steps since then, not all of which the IMF will look upon favourably, mean that survey will be very dated.”

“But, there many technical hurdles still exist and the seemingly ad-hoc and not well communicated changes to its currency regime in recent months will have raised questions within the IMF. With that in mind there must be a very real risk that the IMF delays a board vote into 2016, giving China more opportunity deliver on the IMF’s “freely usable” test.”

“Markets are unlikely to be fazed too much, if at all, by a decision to delay a vote on the CNY. The MSCI’s decision that mainland Chinese equities were not yet ready for inclusion in their indices back in June was a contributing factor to the then bursting of China’s elevated stockmarket. A decision by the IMF to not include the CNY in the SDR could well trigger a major bout of volatility and capital flight from China but politics and diplomacy dictate that the odds of a “no” decision have be quite low.”

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