Surprises in US data and the re-pricing of June / July Fed expectations have added the narrative of US-China monetary divergence: we revise our USD/CNH forecast range 3% higher (to 6.90-7.30) to reflect the recent USD rally.

The market’s current pessimism on China’s recovery, and its prior overweight position in China equities, suggest that the Yuan has further room to fall. However, we expect FX ‘smoothening’ to continue near key levels of 7.15, 7.20, and 7.25 to ensure that Yuan weakness does not amplify market pessimism.

For the PBoC, we think the short-term ‘red line’ is 7.35 – that would be above the Nov 2022 highs and a new all-time high for USD/CNH. Until USD/CNH nears 7.30-7.35, we think further Yuan weakness will be permitted, though the pace of weakness will likely continue to be managed.