J.P. Morgan Stays Underweight CNY

J.P. Morgan updates its views on CNY post yesterday's rebound. The bank stays UW CNY in its GBI-EM model portfolio.

"Going forward, yuan fixing is likely to remain the first line of defence for the PBoC to circumvent one-way CNY depreciation pressures, and today we had the largest daily downsize surprise in the CNY fixing since 4Q22. As we discussed in our China & Hong Kong Local Markets Mid-year Outlook, such resistance from the PBoC is necessary in the absence of organic CNY stabilizing flows from exporter USD selling and we expect PBoC to remain proactive in managing depreciation pressures in the foreseeable future by fully utilizing its FX policy toolkit. However, there appears to be a nuanced difference in PBoC’s FX management on varied external USD context. Of note, the Chinese central bank appears to be more concerned about USD/CNY leading the weakness on stronger USD moves (USD/CNY higher and CFETS TWI lower). This is when the PBoC applies the multi-sigma downside fixing error that is meant to cap CNY TWI weakness and limit the decoupling between DXY and CNY TWI on higher USD moves. On the other side, PBoC’s resistance to CNY underperformance appears to be more tempered when USD/CNY declines on weaker DXY moves, reflected by a much smaller CNY fixing bias during last week’s market rally (lower USD/CNY and lower CNY TWI)."

"Given that the DXY-CNY TWI correlation still holds on weaker dollar moves, less resistance from the PBoC essentially grants a green-light for the CNY basket to drop alongside the dollar. We start 2H23 leaning bearish on CNY FX, a view predicated on the belief that core drivers of CNY weakness in the first half look unlikely to subside meaningfully before year-end. While we believe that shifting narratives around the outlook in US rates and DXY post last week’s CPI print introduce some nuances to our year-end USD/CNY target at 7.25 , they don’t necessarily change the bearish CNY view overall. We see risk reward still favouring positioning for further CNY weakness regardless of the DXY narrative in 2H, albeit with a slightly different preference of expression given different reaction functions from the PBoC (i.e. long USD/CNY on stronger DXY moves and short CNY basket on a weaker DXY). We stay short CNY and retain UW CNY FX positions in GBI-EM, funded selectively by an OW in THB and IDR ."