CNY: How low can it go?

CNY: How low can it go? - Natixis

Nordine Naam, Research Analyst at Natixis, notes that the USD/CNY has tested a 6-year high, with a fixing at 6.7690, the Chinese yuan having weakened by 5.95% over the past year and by 1.6% since the start of October.

Key Quotes

“Of all the Asian currencies, it is the yuan that has corrected most since the start of the year. The yuan’s decline raises the question as to just what is its downside. What therefore is the objective of the PBOC?

First, the depreciation of the Chinese yuan has not been accompanied this time by a spike in volatility. Furthermore, the USD/CNY has not strayed far from the PBOC fixing at the previous close. Similarly, the CNH, something of a proxy for market expectations, has held relatively close to the CNY, as underlined by the CNY-CNH spread that remains near zero (one of the requirements of the IMF for the currency’s inclusion in the SDR currency basket). On the other hand, forwards have deteriorated, but in line with the spot.

To determine if the yuan has more downside, it is necessary to determine whether the US dollar has more upside potential. A simple econometric equation still suggests that the USD/CNY is too high regarding the level of the dollar index DXY. Our view is that the greenback will continue to appreciate in coming months and, especially, in 2017 in reaction to the hikes in the Fed Funds rate (25bp in December 2016 and 75bp over the course of 2017 in our scenario). In this context, we see the DXY dollar index appreciating above 101 mid-2017, so that we expect the USD/CNY to reach 7.0 in 2017.

The acceleration of the yuan’s downturn has also been spurred by capital outflows, these having picked up in recent months (USD 45bn in September after USD 28 bn in August according to SAFE) leading to some strains on short term rates.

Exports remain downbeat, probably on account of the bout of weakness experienced by global trade, with the IMF expecting a slowdown to an all-time low of 1.7% year-on-year. In this context, the USD/CNY could, in the short term, test rather more rapidly 6.85 if, as we expect, the Federal Reserve jacks up the Fed Funds rate in December.”

Share: Feed news

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.