J.P.Morgan: Rate Cuts Add To Bearish CNY Thesis, Stay Long USD/CNH

J.P.Morgan note that “although in general CNY is not considered a currency that is sensitive to monetary policy changes, policy rate decisions from time to time can affect currency performance through the channel of implied cyclical risks. Indeed, today’s MLF rate cut could reinforce market pessimism over China’s economic outlook, which adds to the bearish CNY thesis. As we have highlighted previously, cyclicals may not matter for CNY FX in normal times with current account still the dominant BoP anchor, but can still act as a non-linear guide for the currency amid elevated growth uncertainty. The broad macro backdrop featuring near-term downside cyclical risks domestically coupled with medium-term uncertainties around China’s export outlook in an increasingly challenging external environment does not bode well for CNY FX. With limited visibility on a quick fix for the economy as the zero-Covid policy remains in effect and only targeted rescue measures for the property sector are put in place so far, cyclical pressures on CNY can persist for longer than expected earlier. We stay long USD/CNH.”