CNY: No obvious outflow pressure - Westpac

Analysts at Westpac are now expecting that the next US rate hike to come in June instead of March and therefore, upward pressure on USD/CNY triggered by USD strength is likely to be delayed.

Key Quotes

“Trade relations remain a swing factor, while the impact of tariffs on the regional supply-chain is already evident and the outlook subdued. On balance, USD/CNY is likely to trade in ranges with mild upside risk.”

“USD/CNY should face strong resistance at the 6.85-6.90 area. Indicators including banks’ FX sales and settlement, PBoC forex purchase, and foreign reserves do not point to obvious outflow pressure. The potential bond inflows triggered by index inclusion is significant compared with other BoP items, and should present a key support to the CNY in the face of our expected USD strength going into the second half of the year.”

“The USD/CNY forward points have been falling until recently, as US-China interest rates differentials were compressed. The offshore USD/CNH forward points fell alongside, closing the gap with onshore.”

“We view the movement in offshore points as primarily driven by onshore, while there has been a minimal addition to offshore CNH liquidity through the two main channels – stock flows and trade flows. As the onshore-offshore forward point differentials have narrowed and with CNH liquidity limited, CNH forward points may become more sensitive to any change in liquidity condition onshore or offshore.”