Goldman: Weak Growth And Surprise PBoC Easing Keep CNY Under Pressure

Goldman Sachs note that “July data have showed an unequivocal picture of weak domestic demand in China…Meanwhile, China is also facing the strong headwinds from rising Covid cases and an unusually hot and dry summer that has been stressing power supply and causing production cuts in certain provinces and some energy-intensive sectors, together with lingering property-related risks.”

• “Taking these factors into account, our China economics team has recently cut their 2022 full-year GDP growth forecast for China to 3.0% from 3.3%.”
• “Another major surprise was the PBOC’s surprise policy rate cut (on Aug 15th).”
• “All of this has fed through into FX markets: the yuan has remained under pressure from weak growth expectations and the surprise PBoC rate cut despite China’s strong goods trade surplus.”
• “The PBoC’s tone on FX in its Q2 monetary policy report remained largely unchanged, and the PBoC reiterated it would keep the exchange rate broadly stable at equilibrium levels.”
• “Given our expectations for broad U.S. dollar strength and still-weak China growth, we still see risks of further upside to USD/CNY in the near term and expect that the CNY can underperform NJA FX in H222.”