Standard Chartered Upgrade Near Term CNY View To Overweight

Standard Chartered note that “the emergence of the Omicron variant has deepened concerns about a global COVID resurgence while prompting renewed CNY appreciation expectations. A new global COVID resurgence may delay China’s border reopening, underpin its balance-of-payments (BoP) strength, and reduce the growth divergence between China and major Western economies in H122. Possibly sustained accommodative liquidity conditions in developed markets could prompt stronger capital inflows to China on higher rates and more muted inflation.”

• “We see USD-CNY strengthening further near-term; we upgrade our 3-month weighting to overweight from neutral and lower our USD/CNY forecasts to CNY6.30 for end-Q122 (from CNY6.50), CNY6.35 for end-Q222 (from CNY6.55), and CNY6.40 for end-Q322 (from CNY6.55). We keep our end-22 forecast unchanged at CNY6.50, given likely monetary policy divergence between the PBoC and major central banks, and a likely decline in CNY real rates in H222.”
• “But room for material appreciation appears to be limited. The PBoC will likely step up counter-cyclical measures on renewed appreciation pressure, following material CNY gains versus all of China’s major trading-partner currencies. The odds of heavy-handed direct intervention remain low, in our view, as recent CNY appreciation is largely fundamentally driven. We think the most likely option to curb further appreciation is to raise the foreign-currency required reserve ratio (FCY RRR) further, after a 200bp hike in June. The authorities could also take more actions to reduce onshore banks’ speculative positions by narrowing their net open position (NOP) limits, expanding outbound investment channels, and re-introducing the counter-cyclical adjustment (CCA) factor.”