USD/CNY to see more two-way movement, not a downtrend – HSBC

USD/RMB broke the 6.40 level in late May. The recent measures and comments out of China suggest a policy preference for broad RMB stability, in the view of economists at HSBC. What’s more, cyclical developments, such as slowing growth and narrowing yield advantage, may weigh on FX inflows. USD/RMB is set to have more two-way movement and then rise slightly later this year.

China remains focused on capital account liberalisation

“We believe the recent comments and countercyclical measures out of China (with some examples listed below) suggest that, while there is no line in the sand, there is still a policy preference for basic stability of the RMB exchange rate.”

“We do not believe the recent downward momentum is the beginning of a long-term RMB appreciation trend. Cyclical indicators are pointing to a likely slowdown of GDP growth and smaller yield advantage for China in 2H21. We expect these cyclical developments to see net FX flows to China moderating in 2H21.”

“Broad USD weakness may be tested, if the Federal Reserve’s (Fed) tapering debate picks up later in the year and some of the generous USD liquidity conditions could subside later this year. Our economists expect an official tapering announcement at the end of the year and implementation in 2022.”

“We think that China’s broad FX framework has not changed, namely two-way capital account liberalisation is maintained with the aim of achieving a balanced flow. Our base case sees USD/RMB exhibiting more two-way movement and then rise slightly later this year, when China’s outbound investment liberalisation accelerates, likely in 2H21.”