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USD/CNH Comes Off Earlier Highs, Holds Near Recent Lows

CNH
USD/CNH opens slightly lower, the pair last at 6.5186 after moving as high at 6.535 in the European session. The UK and EU have both stopped short of imposing sanction on Chinese officials alongside the US, but haven't ruled out action down the line.
  • The yuan has strengthened significantly so far this year, and data releases continue to show the country powering ahead of its global peers in its recovery from the coronavirus pandemic.
  • There are a few key factors that could continue to strengthen the currency: economic growth, balance of payments and inflows.
  • China's economy is growing at a faster pace than its western peers, GDP grew 4.9% annually in Q3, by comparison most western economies aren't expected growth in the annual figures until the first half of 2021.
  • A growing current account surplus, due to stronger exports, lower imports and a smaller service balance deficit is likely to exert upward pressure.
  • The yuan is still solid carry trade, even when adjusted for volatility. Yuan forwards suggest that this dynamic is set to continue. 1-year forward points hover around 1,674 and have consistently been above 1,600. This is down to the perceived economic recovery and the fact that the PBOC hasn't jumped on the central bank easing bandwagon, meaning yuan forwards still benefit from higher implied yields over the US.
  • These forward points have held despite China selling its first negative-yielding government bond in November, reducing funding costs and effectively benefitting from this year's plunge in interest rates in the pandemic.
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