AUD/CNY: Westpac: Yuan Fundamentals Remain Strong

Westpac note that “AUD/CNY rolled over from above CNY4.80 early November to a CNY4.55 handle end-month, printing lows since May 2020 in the process. A$ underperformance was broad-based in November. But the yuan has a clear positive story of its own.”

• “The trade-weighted Chinese yuan has surged since Aug 2020. By Q320, the rebound in China’s economic growth was very clear, while other nations had multiple waves of COVID, puncturing growth. In a world of historically low bond yields, China’s yield appeal remains intact e.g. its 10-Year government bond yield is around 2.85% versus ~1.50% on the 10-Year U.S. T-note, helping keep capital in China.”
• “Yuan appreciation has also been backed by a surge in China’s trade surplus. A world of work from home and a demand for medical supplies has helped bolster China’s goods exports, while closed borders have shrunk China’s services deficit.”
• “Rising commodity prices may be one reason for China’s increased tolerance of a stronger yuan, which is obviously a positive for AUD. But if the FOMC speeds up tapering in Dec as we expect, USD should strengthen, hitting A$ harder than CNY, despite Australia’s post-lockdown economic recovery.”