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Should We Expect A Sharp CNY Depreciation In The Coming 6 to 12 Months?

  • With the China 10Y bond yield premium (over US 10Y) plunging to zero, investors have been questioning if the risk reward on USDCNY is now skewed to the upside following the sharp Yuan appreciation in the past two years.
  • We also saw that the premium on the 2Y yield (China vs. US) went negative in the end of March following the dramatic surge in US ST rates in the past month.
  • USDCNY has been trading above the 6.35 level in the past month after testing a local low at 6.3070 in the beginning of March.
    • Key resistance to watch on the topside stands at 6.4050 (200DMA).
  • The chart shows that the 10Y interest rate differential (between US and China) has smoothly led the USDCNY exchange rate by 12 months.
  • Hence, selling pressure on the CNY could gradually increase in the coming months as the interest rate differential keeps reaching new highs.

Source: Bloomberg/MNI.

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