SocGen Sees More Downside in CNY & China Rates

SocGen see further downside in both CNY and China interest rates, but the pace of declines are unlikely to be as strong as moves seen in recent months, see below for more details.

FX: "USD/CNY risks are skewed to the upside. We maintain our year-end forecast for USD/CNY
to reach 7.40. The recent price action in USD/CNY resembles the trend seen from mid-March to
end-April. After the NPC in March, the USD/CNY remained range-bound at around 6.90 until May.
Then, with economic indicators such as PMIs having deteriorated since the NPC, the PBoC
announced a surprise cut to the 7d reverse repo rate to 1.9% on 13 June. In response, USD/CNY
rose quickly from the 6.90 level to 7.25 in June." "The risk to our view is that the PBoC will over-intervene to tame market sentiment if the pace of increase in USD/CNY accelerates taking the rate above 7.30 quickly. Therefore, any rise in
USD/CNY is likely to be half as strong as that seen in 1H this year (e.g. from 6.7 to 7.25)."

RATES: "China rates have room to decline further. With 10y CGB yields having declined to around
2.60%, further PBoC easing, such as an RRR cut or 7d reverse repo cut, becomes necessary for 10y
CGB yields to break below the 2.60% support line. We and the market consensus are expecting
further PBoC easing soon. Nonetheless, we believe that any further China rates rally is unlikely to
be as strong as the move seen since February (10y CGB yields down 35bp from February to July).
If the effect of a sizable policy rate cut is taken as a risk-on factor, the subsequent improvement
in risk sentiment could dilute the China rates rally given a tighter correlation between CGB and
risk sentiment. Henceforth, we maintain our 10y CGB yield forecast of 2.50% in 3Q."