USD/CNY: Yuan set to continue to rally on Biden victory – MUFG

USD/CNY has fallen to fresh lows around 6.62 after briefly hitting an intraday high on Wednesday of almost 6.7500 when it looked more likely that Donald Trump would deliver another surprise victory and remain President. As Democratic candidate Joe Biden is on the verge of victory, the Chinese yuan should see more gains against the US dollar, per MUFG Bank.  

Key quotes

“After winning the key swing states of Michigan and Wisconsin, Joe Biden is now on the brink of victory. He has won 264 Electoral College votes out of the 270 needed to win the presidency, and now only needs to win one additional state. He is currently leading in Nevada and still has a fighting chance of winning in Georgia, North Carolina and Pennsylvania where he is currently behind. In contrast, Donald Trump must win all remaining states to remain president which is an uphill task but not impossible at this stage. President Trump is unlikely to lose gracefully and has already threatened a wave of election lawsuits.”

“The upshot is that Congress is set to remain divided following the election. Hopes for a Blue Wave did not materialize and this has resulted in one of the clearest financial market outcomes as long-term US yields have fallen sharply in response to the paring back of fiscal stimulus expectations. It will now be much harder to push through significant stimulus under a divided Congress although not impossible as we have seen following the covid shock.”

“The prospect of less fiscal support will increase pressure on the Fed to deliver more fiscal stimulus to support the economy. The Fed has already committed to keep loose policy in place for much longer into the economic recovery than normal, and we still expect the Fed to step up the pace of QE even if there is less upward pressure on long-term yields as result of dampened fiscal stimulus expectations. It should help to keep the US dollar under downward pressure in the year ahead although downside risks have eased in comparison to if there had been a Blue Wave which would have helped push down real yields more in the US. We do not expect the Fed to take any immediate policy action tonight given its close proximity to the election, but remain hopeful that more stimulus will be delivered in December.”

“The renminbi and other Asian currencies should also continue to benefit against the US dollar on the back of expectations that US trade policy is likely to become less confrontational under a Biden presidency. It will keep alive hopes that Trump’s tariffs could be reversed in the coming years. A development that should be supportive for emerging market and commodity-related currencies more broadly, but it is partially offset by the reduced likelihood of bigger fiscal stimulus.”