USD/CNY: Yield advantage to strengthen the yuan – HSBC

The US and China see progress in a top-level review of the Phase 1 agreement. Meanwhile, USD/CNY is still most sensitive to US-China trade matters, according to economists at HSBC who also believe that many domestic factors are supporting the Chinese yuan, in particular its yield advantage. Therefore, they expect USD/CNY to touch the lower end of the 6.84-7.20 range.

Key quotes

“On 24 August, US Trade Representative Robert Lighthizer and US Treasury Secretary Steven Mnuchin had a call with China's Vice Premier Liu He. The US acknowledged that China has taken steps on various structural reforms and that there have been significant increases in China's purchases of US products. Both sides see progress and are committed to taking the steps necessary to ensure the success of the agreement, according to a statement from the Office of the United States Trade Representative, dated 24 August.”

“Although US-China tensions have broadened beyond trade and there could still be negative headlines regarding Chinese technology companies and geopolitical issues, we believe USD/CNY is most sensitive to trade matters.”

“There are many domestic factors supporting the CNY — including its yield advantage, growth recovery, structural portfolio inflows, and undemanding valuation. If the central bank judges the current credit/money conditions as sufficient for a further economic recovery (as they are still higher than nominal GDP), the CNY's yield advantage can widen further. This would lead to further outperformance of the CNY, despite the ongoing US-China tensions.”

“The year-to-date range for USD/CNY is roughly between 6.84 and 7.20. A temporary revisit of the lower end of the range is plausible, considering that the US Dollar Index (DXY) has already fallen to levels last seen in mid-2018.”