USD/CNY set to rise and trade in a 6.60-6.70 range – Nordea

The bulwark protecting the Chinese yuan from domestic regulatory tightening and signs of weakening growth is starting to show signs of cracking. Adding monetary policy divergence versus the US to the picture, we will see the scales tilting and weighing on CNY, according to economists at Nordea.

CNY headwinds are gathering speed

“While we do note China’s interest in reservernizing CNY, we do not expect resistance from policy makers, on the contrary, it will alleviate concerns on weaker global demand and Chinese funding inflows. Hence, we see very slim chances that USD/CNY will edge much lower, rather we see red lights flashing, signaling CNY depreciation to the range of USD/CNY 6.60-6.70.”

“A hawkish Fed combined with a moderately dovish PBoC stance will narrow a so far wide yield gap in favor of China and weaken otherwise strong CGB inflows. There is a risk that ‘Evergrande scares’ will intensify this movement.”

“China’s exploding export will most likely continue to fade as demand from stimulus fueled trading partners normalizes and Chinese production costs continue to surge – we think policy makers will welcome CNY depreciation.”

“The yuan has so far been bulwarked by strong exports, foreign funding flow and a higher than usual CNY settlement flow. The two first factors will likely fade.”