CNY to continue its gradual continued weakness past 7.00 to the USD - UOB

Analysts at UOB, suggest that the recent escalation in tension in US-China relationship is unlikely to derail USD/CNY materially from its upside trajectory towards the psychological 7.00 level.

Key Quotes

“Reaching that level is still a matter of time, especially when recent data has shown a marked deterioration of the Chinese economy as negative effects of the trade conflict between US and China are starting to show.”

“While the direction for more CNY weakness is obvious, the pace of further CNY weakness may still be measured. Markets probably took into account the various targeted measures implemented by the PBoC in the last few months. A 20% reserve margin ratio for forward sales of CNY as well as the reintroduction of Counter Cyclical Factor (CCF) have discouraged speculation and dampened extreme moves in the domestic currency. Barometers of RMB devaluation pressures such as the CNH forward points and the gap between CNY and CNH remain relatively low and stable.”

“We maintain our measured trajectory of USD/ CNY above 7.00 next year, with point forecasts at 6.95 at 1Q19, 7.00 at 2Q19, 7.10 at 3Q and 4Q19. As both CNY and CNH forwards are still below the psychological 7.00 level, one may find value in hedging for further USD upside at current levels. At this juncture, it is probably premature to anticipate any sustained recovery in CNY after the recent truce on trade tariffs, especially when details are still lacking and challenges for an eventual resolution remain.”