The CNY is one of the undisputed winners in this post-corona world. Since May, USD/CNY has fallen by 7%. The strengthening of CNY is driven by the outperformance of the Chinese economy and increased likelihood of a Biden win. Economists at Danske Bank forecast the USD/CNY pair at 6.60 on a twelve-month view but there are downside risks to their outlook.
Key quotes
“We think two factors explain the move. The outperformance of the Chinese economy amid better control over the coronavirus and higher interest rates than the US; and the increased likelihood of a Biden win, reducing the risks of an uncontrolled, damaging trade war that would ensue under a second term Trump presidency (yes, Biden will also be tough on China, but in a different, more multilateral and predictable way, which provides more certainty for investors and about the Chinese economy).”
“We see potential for more strength if indeed the US election turns out to provide a clear Biden win, creating downside risk to our twelve-month USD/CNY forecast of 6.60. Among upside risk for the cross is a surprise Trump win and/or a muddy election result as well as renewed rising tensions between US and China, but also between China and Taiwan where tensions have built lately.”
“A stronger CNY is generally good for the global economy. It makes it cheaper for foreign companies to sell their goods on the Chinese market, boosting export growth in economies like Germany and Asia and to some extent Latam which supplies a lot of raw material to China. It strengthens global reflation as import prices increase in the rest of the world on more expensive imports from China which is still a very important production hub. This is good news for the efforts in economies such as the eurozone which is struggling to get inflation rates up. A stronger CNY also defuses criticism in the US that China is trying to gain advantage from a cheap currency, reducing the risk of adverse restrictions on trade with China.”
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