CNY: Rocky road ahead

Iris Pang, economist at ING, thinks imposing more tariffs isn't the most effective way to create more hurdles for the Trump Administration who will soon begin to campaign for the 2020 presidency but China could probably cause more problems if it keeps catching US stock markets off guard as well as President Trump’s potential voters.

Key Quotes

“There are two measures ready for China:

Unreliable entity list

Inclusion of any US companies in the list means those companies cannot tap into the Chinese market. This is a very powerful tool and will probably rock asset markets. The yuan is likely to weaken out of the blue to show its responsiveness to the influential event.

Firm stance on trade talks

Talks without progress are more likely to be prone to additional tariffs from the US. Even though this is expected, this will weaken the yuan a lot. USD/CNY could cross 7.18 (the recent high) to near 7.20. This alone, without any retaliation from China, has the potential to create another market chaos.”

“Revising yuan forecasts

Both measures will end up with a weaker yuan, as such, we revise our USD/CNY forecasts.
But we think the central bank won't want the market to believe that the yuan can only depreciate against the dollar. So we expect that in between these “unexpected” events, the yuan will strengthen against the dollar from time to time.
Our range forecast of USD/CNY for the rest of 2019 is 7.05 - 7.50. The volatilities should be high given that China's objective is to use yuan as a surprising tool for the market. The spikes in USD/CNY may not be reflected in the quarter-end point forecasts. Our previous forecasts were 7.10, 7.00 and 6.90 for the end of 2019, 2020 and 2021, respectively.”

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