Potential ‘Relaxation’ of Covid-Zero Policy: Good Or Bad News for CNY?

• Since the start of the pandemic, China has clung to a ‘Zero-Covid Policy’, which has been weighing on the domestic economy and significantly disrupted the global supply chain (i.e. port closures).
• Even though China officials have sent clear signals on ‘easing policy’, the current risk-off environment driven by the Russia/Ukraine conflict combined with the recent renewed crackdown fears have left domestic risky assets vulnerable in recent weeks.
• On the other, momentum on CNY has remained firm as the yuan has been inheriting from a ‘flight-to-safety’ with some investors looking at the yuan as a hedge against geopolitical uncertainty in the ‘West’.
• Interestingly, Zeng Guang, chief epidemiologist of China’s CDC, mentioned on Monday that Zero-Covid policy measures ‘will not remain forever', inferring that officials may slowly shift to a gradual ‘reopening’ of the economy.
• Even though there is ‘no hurry’ in changing the Covid policy from Chinese officials in the short term, this is a radical change from previous statements, which would help the economy reach its ‘growth target’ of 5.5%-6%.
• This could continue to support the CNY in the coming months as positive readjustments in growth expectations (relative to Western economies) has generally been positive driver for the domestic currency.
  • USDCNY fell below the 6.31 level earlier (before edging slightly higher); next ST support to watch on the downside stands at 6.30.
  • Key support to watch remains at 6.2430, which was the low reached on March 27^th 2018.

• The 21st Century Business Herald also reported that more institutional investors raise the short-term outlook of yuan against the U.S. dollar to around 6.25, or even above 6.2, with global risk aversion rising amid the Russia-Ukraine conflict (reported Tuesday overnight).

Source: Bloomberg.