Chinese yuan bears are undeterred by PBoC’s grip Chinese yuan bears are undeterred by PBoC’s grip Chinese yuan bears are undeterred by PBoC’s grip

Chinese yuan bears are undeterred by PBoC’s grip

Forex 4 minutes to read
Charu Chanana

Head of FX Strategy

Summary:  The downside pressure in Chinese yuan is ramping up even as the People’s Bank of China (PBoC) tries to maintain its grip. Given macro fundamentals and USD resilience, it appears that the path of least resistance for USDCNH could be neutral to higher. Meanwhile, weaker Chinese yuan is a play on Trump risks while providing a positive carry.


Both the onshore and offshore have weakened in Q1. USDCNH is back above 7.25 for the first time since November 2022 and has traded more than 2% weaker than the PBoC’s fixing for onshore spot every day since March 22. USDCNY is also testing the upper bound of the PBoC’s trading band as shown in the chart below.

The breakout began after traders were spooked by the PBoC fixing the CNY mid-rate above 7.10 for the first time in two weeks on March 22. This fuelled speculation that China’s central bank is loosening its grip on the yuan and could let it weaken. Despite the PBoC reversing its fixing to below 7.10 levels the following day, yuan bears were undeterred and this serves as a bearish signal. CNH-CNY spread is over 200 pips, also signalling bearishness.

Dollar resilience has also contributed to weakness in the Chinese yuan, but there are several other reasons why markets could continue to test the PBoC’s grip, as listed below.

  1. Macro lens supports a weaker yuan: Amid weaker Chinese consumption, there's a growing emphasis on exports to support the economy, making a weaker yuan more logical than a stronger one.

     

  2. Weaker Japanese yen is worrisome for China: Continued depreciation of the Japanese yen poses a challenge for Chinese authorities due to heightened competition in export markets, potentially eroding China's export competitiveness.

     

  3. Geopolitical risk play: Weaker Chinese yuan serves as a thematic bet on geopolitical uncertainties, particularly if Trump maintains a lead in polls ahead of the November elections which will bring tariff concerns.

     

  4. Long USDCNH is a positive carry: While it may be fair to expect that the Chinese authorities are unlikely to let the yuan weaken in a disorderly manner given the risks facing the Chinese economy at this time, there is still a case to be made for incremental weakness as noted above. Even if USDCNH remains range-bound, the pair has a positive carry because US yields are significantly higher than Chinese yields. This means that you get paid to hold on to it as you position for the US election risk.

     

  5. Positioning and technicals are supportive: Positioning in yuan is neutral, and the triple top resistance around 7.2330 is now serving as a support.
Source: Bloomberg

Still, risk management is prudent as yuan remains firmly in control of the PBoC. A weaker USD can also push the yuan to stronger levels, as can a steep recovery in the Chinese economy.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) Ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law. 

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.