Tolerance For Yuan Weakness In Focus Following Sharp Losses On Friday

Friday highs in USD/CNH came close to 7.2800, before the pair closed around 7.2760 in NY. This was a CNH loss of 0.75%. Onshore spot finished up at 7.2292, a loss of 0.41%, after USD/CNY finally broke above resistance at 7.2000 early in Friday trade. The CNY NEER (J.P. Morgan index) fell 0.16% to 124.50.

• Technically, for USD/CNH, the break higher ends a period of sideways trading and confirms the resumption of the uptrend that started in Dec 2023. Our technical analyst believes that there is scope for a climb towards CNH7.3020, the 76.4% retracement of the Sep 8-Dec 29 bear leg.
• Focus is also likely to rest on the USD/CNY fixing, which pushed above 7.1000 on Friday. A further rise in today's fix would likely be seen as a green light for further yuan losses. The other focus point will be state bank action, which was reportedly absent in early Friday trade (from a USD selling stand point), although reportedly came in later. The market will be looking to assess how much yuan weakness the authorities will tolerate.
• China Premier Li Qiang downplayed weaker economic risks during a speech at the China Development Forum yesterday and noted policy space remains ample (see this link). Focus was also on potentially more supportive property policies following a State Council meeting late last week (see this link).
• Equity sentiment was a negative with the Golden Dragon index losing 1.8% in US trade on Friday. This followed onshore losses of around 1% for the CSI 300 and Shanghai Composite Index in local onshore trade. Northbound stock connect flows were negative as well on Friday.
• The local data calendar is empty today.