firms can be naturally slowed by internal directives. Bad outflow such falling CNY deposits among foreign subsidiaries of China banks can also be managed. However, it is the inherent speculative and unstable nature of domestic capital flight that we characterize as ugly flows that poses the greatest risk to the central bank. Regressions and scenario Implications for EM FX We used a simple regression to quantify the impact of the RMB depreciation on key EM FX: BRL, RUB, INR, TRY, and ZAR’. We analyzed two cases: 1) Base case — USD/CNY rises to 7.25 and market volatility, which we use the VIX as a proxy, is unchanged from its current level; 2) Risk case - USD/CNY rises to 8.00 and intense RMB depreciation expectations cause market volatility to rise by three standard deviations. We find: e The most vulnerable currencies to RMB depreciation are ZAR, RUB and TRY (Chart 58). The impact of RMB depreciation on BRL and INR is small. This is probably due to stronger idiosyncratic factors for BRL and INR in recent years. e Anincrease in market volatility associated with USD/CNY rising to 8.00 would raise the depreciation of EM FX by 1ppt (BRL)-11ppt(ZAR) relative to our 7.25 baseline. « In our base case of USD/CNY rising to 7.25 by end-2017, the market is overpricing depreciation pressures from the RMB on EM currencies. This partly reflects other factors have more sway over market expectations at the time of writing, such as implications of the US elections outcome. e Inour risk case of USD/CNY rising to 8.00 and high volatility, there is room for additional depreciation in the ZAR and RUB (Chart 58). Chart 58: EM FX sensitivity to RMB and market volatility Chart 59: Scenario analysis of EM FX against market pricing 5 5 0 0 5 5 = o a | 10 o o a -10 45 a 15 -20 a 20 ZAR RUB TRY BRL INR ZAR RUB TRY BRL INR WForecast change vs SDR, % (Volatile markets and USD/CNY at 8.00) m Forecast change vs SDR, % (Volatile markets and USD/CNY at 8.00) Forecast change vs SDR, % (Same volatilit