CNY: Controlled depreciation – ING

USD/CNY edged a little higher today to around 7.33 as the People's Bank of China (PBoC) set its daily fixing above 7.20 for the first time since 2023. Despite another round of tariff threats from Trump, the mood in markets was relatively stable today, showing that further tariff threats at this point will have heavily diminishing returns, ING’s FX analyst Lynn Song notes.

CNY to fluctuate in a 7.00-7.40 band this year

"The developments from the past week illustrate very clearly why we have been arguing for the past half year that intentional CNY depreciation to offset tariffs was a heavily flawed argument. If China was truly planning to rely on devaluation to help offset tariffs, CNY would’ve needed a massive devaluation to do so, and such a move could easily be countered by further tariff hikes from Trump."

"Furthermore, the damage of yuan devaluation to domestic purchasing power, market sentiment, and China's RMB internationalisation plans would far outweigh the benefit to trade. The benefits of a stronger CNY are further magnified as tariffs could accelerate the trend of Chinese companies expanding outward investment."

"Near-term risks remain. Further external shocks, capital outflow, and PBoC easing could add to depreciation pressure. However, the PBoC will likely keep the upside of USD/CNY capped, and in the medium term, a rising probability for faster Fed cuts this year, combined with likely aggressive policy support in China, could narrow US-China yield spreads and favour a CNY recovery. We’re holding our CNY fluctuation band at 7.00-7.40 for this year."