J.P.Morgan Flag Limits To Any Fall In CFETS TWI

J.P.Morgan think that the “ad-hoc large USD/CNY fixing surprises since late last year mark a change in PBoC’s FX policy in setting a ceiling for the CFETS TWI, which most likely will lift CNY’s trading band from CNY6.35-6.40 to CNY6.40-6.50 in the near term. Markets should not overestimate PBoC’s desire for policy-engineered volatility and/or disruptive currency weakness. Against this backdrop, we think there is a limit to how far the free fall in CFETS TWI can continue, especially as a decent degree of pessimism about fundamental flow weakness is already in the price. We are not fundamentally opposed to higher USD/CNY as this is what our original forecast track suggested, but such weakness has clearly come earlier compared to the back-loaded weakness we had pencilled in. This week’s sharp move merits a revisit of our USD/CNY forecast especially the front-end. We revise our near-term USD/CNY target from CNY6.35 to CNY6.50 for Q222 and Q322, and also lift the 1-Year target albeit at a smaller increment to CNY6.60 (vs CNY6.55 previously). This forecast profile corresponds to the CFETS TWI staying flattish around current levels considering fundamental flow support, before trending more visibly lower towards the 102 handle at the turn of 2023.”