USD/CNY: Short-term strength, long-term weaker yuan – Danske Bank

The Chinese yuan has continued to strengthen throughout the year and is now up 10% from the bottom last year. Economists at Danske Bank highlight four reasons for the strength of the CNY. They look for continued CNY strength near-term as the four forces will probably continue to dominate. However, during 2022 they expect CNY to weaken.

CNY to weaken during 2022

“We highlight four reasons for the strength of the CNY: 1) Record trade surplus, 2) Strong net Foreign Direct Investment flows, 3) A smaller service deficit due to less outbound tourism and 4) speculation over US tariff cuts.”

“We expect the strong flows underpinning CNY to continue in the short term. US goods consumption will likely remain strong through the winter as a new Covid wave is likely. However, during 2022 we expect CNy to weaken as a) we look for the trade surplus to come down on the back of the US consumers eventually buying fewer goods from China and b) rate increases from the Fed amid moderate easing measures by PBoC reinforces the divergence in policy rates.”

“We look for USD/CNY to trade around 6.40 in the short-term, before starting a move higher towards 6.55 in 6M and 6.80 in 12M. This is higher than the forward market which trades at 6.56 in 12M.”