USD/CNY to navigate below 6.40 through the second half of the year – TDS

CNY strengthened to multi-year highs vs. USD and on a trade-weighted basis causing a high degree of consternation among China's policymakers. Mitul Kotecha, Chief EM Asia and Europe Strategist at TD Securities, thinks China will be increasingly wary of further CNY appreciation especially on a trade weighted basis and may open the door slightly more to outflows.

China is resisting renminbi strength, what next?

“We think China's authorities will be increasingly wary of further CNY appreciation on a trade weighted basis. However, this will not prevent USD/CNY from edging lower in the months ahead, with USD/CNY likely to trade below 6.40 through H2 2021.” 

“Should the USD weaken further CNY will appreciate vs. USD but likely at a slower pace than its peers, taking some of the steam out of its trade weighted strength. Conversely, if the USD strengthens more broadly, CNY is likely to weaken vs. USD but likely at least at the same pace also to avoid trade weighted strength.” 

“We think the authorities will aim at a ceiling of around 98 on the CFETS index, with preference to move back into a 96-97 range, where it has been for most of this year (from just under 98 at present).”