The Chinese yuan is now weakening after a long period of relative stability. Analysts at Credit Suisse still expect USD/CNH upside, albeit now in wider and higher 6.55-6.75 range over the next three months.

Comments on two-way volatility point to further USD/CNH upside

“We think the 25 April People’s Bank of China (PBoC) decision reduce FX RRR for Chinese banks, which will release $10bn of USD supply into the market, was intended to slow, but not reverse, the yuan’s recent correction. The timing of the announcement (shortly after USDCNH broke through 6.60) will lead markets to view the 6.60 level as a short term red-line. However, we expect USD/CNH to rise through 6.60 (albeit at a more gradual pace).” 

“The Shanghai COVID-19 wave shows that Omicron’s high transmissibility makes new clusters much harder to contain, and there is still risk of new outbreaks across other Chinese cities. As such, the growth outlook for 2022 will likely be uneven. It will take a much larger economic downturn for China’s leaders to abandon their strict ‘zero COVID-19’ approach.”

“The FX RRR cut shows that the PBoC still maintains a ‘put’ on China’s financial markets. However the central bank’s tolerance for volatility is much higher than we initially thought. Comments by the head of China’s FX regulator that two-way volatility will continue points to further USD strength against the now de-coupled yuan. We still expect USD/CNH upside, albeit now in wider and higher 6.55-6.75 range over the next three months.”