USD/CNY: Year-long yuan rally may have run its course – DBS Bank

The Chinese yuan appreciated to a three-year high of 6.3685 per USD on 28 May. At this level, the CNY has strengthened 12.5% from its worst level of the COVID-19 outbreak in May 2020. However, the themes that fuelled the yearlong appreciation of the CNY may have run its course, in the view of Philip Wee, FX Strategist at DBS Bank.

USD/CNY has scope to consolidate between 6.40 and 6.60 for the rest of the year

CNY will be boosted by China’s strong growth prospects (not quite)

“CNY bulls have overplayed China’s strong GDP growth rebound of 18.3 YoY in 1Q21. Looking ahead, our Hong Kong colleagues expect China’s growth to slow to 10.5% YoY in 2Q21 and stabilize around 6-7% in 2H21. China’s recovery from the pandemic remains shaky. Against such a backdrop, the government sees a challenge to create 11 million urban jobs and to lower the unemployment rate to 5.5%.”

A stronger CNY will curb inflation (rejected by regulators)

“The PBOC issued a statement on 27 May that the CNY cannot be a tool to offset the impact of surging commodities. To this end, regulators will tighten supervision of the commodity futures and spot market to discourage price collusion, the spread of false information, hoarding and other illegal activities. Our economists believe that inflation could average higher at 3.5% and 4.5% in 3Q and 4Q respectively. Even so, full-year inflation is expected to come in at 2.5% or below the official target of 3% for 2021.”

CNY will replace the USD as the dominant currency (will take time)

“PBOC deputy governor Li Bo confirmed that there was no timeline for a nationwide rollout of the pilot e-yuan project which is still in its testing phase. According to a Business Times article in May, China is facing a challenge to get more consumers and merchants to accept and adopt the e-yuan in a market dominated by Alipay and WePay. Former PBOC governor Zhou Xiaochuan recently called the threat of the e-yuan to the USD’s dominance as misguided speculation.”

China-US relations returning into focus

“CNY has scope to consolidate between 6.40 and 6.60 for the rest of the year as focus shifts from the recovery to US-China relations. Finding a middle ground remains challenging given the red lines drawn across issues from trade practices, technology, defense, national interests, sovereignty and human rights. It is therefore hard to expect a more assertive China to allow more CNY appreciation to correct the large bilateral US-China trade deficit. China’s regulators have also refuted arguments for a stronger CNY to curb inflation and halted oneway appreciation bets in the CNY.”