- Since the start of the year, investors have been questioning if the monetary policy divergence between US and China will lead to a weaker Yuan in the medium term
- While the Fed stepped out of the market on March 9th, the PBoC balance sheet keeps rising at an annual rate of 5%, pressuring CNY to the downside
- On the other hand, equity inflows and a gradual decline in geopolitical uncertainty could act as positive drivers of the Yuan in the medium term
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Central banks' balance sheet asset differential has been another important driver of currencies in the past 10 years, particularly since Covid shock.
Interestingly, PBoC keeps expanding the size of its balance sheet by approximately 5% a year, while the Fed has stepped out of the market on March 9, leading to an increase in the PBoC/Fed balance sheet differential since the start of the year (chart below).