Client note from UBS via our friends at Livesquawk
- China may end up reducing intervention in the coming months because the Fed has initiated lift-off and hedging has increased
- if we are wrong and China maintains or increases its pace of FX intervention then we believe investors will have reason to become significantly more concerned about the adequacy of China's FX reserve levels by mid-year
- part of the PBOC's aggressive intervention since the August RMB devaluation was to reduce the risk of a banking crisis stemming from the proliferation of un-hedged FX liabilities and short FX vol positions through leveraged products against a backdrop of rising volatility and capital outflows and a Fed preparing for lift-off
PBOC forex reserves at end-Dec were $3.33 trln but on the decline in 2015, largest annual drop on record
