Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Chief Investment Strategist
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.
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.
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