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USD/CNH Uptrend Persists, But The Authorities Appear Prepared To Ride Out USD Strength

MARKET INSIGHT
  • From earlier YTD lows, both USD/CNY & USD/CNH are nearly 7% higher. The yuan is the second weakest performer in Asia YTD (MYR is the worst). The yuan has come unstuck as the re-opening trade has lost momentum, which has weighed on China asset sentiment more broadly. US-China tensions haven’t helped either.
  • A continued elevated US yield backdrop is the other yuan headwind, although China is not alone on this front. Uncertainty remains around the state of the US rate cycle, we get a fresh update on Fed thinking and May CPI this week.
  • Despite the recent yuan weakness, the authorities appeal fairly relaxed about the current FX backdrop. The CNY fixing has shown little pushback against renewed depreciation pressures. This may change if we see depreciation pressures quicken or we revisit CNY lows from Q4 last year.
  • This week we get updates on May China activity data, as well as new lending/credit. There is also speculation we could see a MLF cut on Thursday.
  • All in all, it may take a more definitive peak in US rates/coupled with a better China growth outlook to bring a meaningful correction in USD/CNH.
  • See here for more details.
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