Societe Generale: Weaker CNY Call Delayed Not Dismissed

Societe Generale note that they "have been expecting the yuan to weaken against the U.S. dollar, but this call has not materialised. The export and trade surpluses have remained stronger and more resilient than we thought, the PBoC has been less dovish than we expected and the dollar has not strengthened as much as we anticipated. Yet, we continue to think it is only a matter of when not if for a weaker yuan."

• "Markets have completely priced out PBoC easing. Even if the PBoC continues to delay headline easing moves, expectations for PBoC easing can only go up from here. Hence, the scope for liquidity conditions to tighten and CNY rates to move higher should be limited. The PBoC may be held back by surging upstream inflation for now, but it is unlikely to favour further yuan strength. We still think that the PBoC will have to embark on broad-based easing by the year-end. Beijing's determination to speed up the "Common Prosperity" reform, of which deleveraging is an integral part, means higher tolerance of slowing growth than before. However, policymakers have also warned that systemic risk - financial or economic crisis - is a line not to cross, and so it is only logical to expect incrementally more easing as the economy loses momentum."
• "We see little room for the USD/CNY to head lower to CNY6.30 by the year-end and expect the CNY to weaken afterwards, given our expectation for further slowdown in China's growth and a strengthening dollar next year. Over the course of 2022, we expect USD/CNY to bottom out and grind higher to CNY6.35 in Q1, CNY6.45 in Q2 and reach a plateau at CNY6.50 in H2."
• "Yet, there is a risk that our views on BoP and monetary policy divergence may not materialise quickly. Wary of COVID-19-induced supply shocks in other EMs, foreign firms have increased their FDI in China, which could support China's exports for longer. And service spending in developed economies may not pick up fast or overall economic growth may still disappoint, dragging down the pace of monetary policy and yield normalisation."