Analysts at Nordea Markets note that CNY was among the currencies that came under very strong pressure during the past month as it has depreciated more than 4% against the USD since mid-June.
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“It has not lost this much during 13 trading days since 1994. It was primarily driven by worsening sentiment amid the upcoming trade war with the US. The two countries plan to impose 25% tariffs on USD 34bn of imports from each other on 6 July, with an additional USD 16bn following soon after.”
“Moreover, Trump threatens to levy 10% tariffs on an additional USD 400bn of Chinese imports if China retaliates. The fear is that a total of USD 450bn of Chinese goods will be subject to higher US tariffs, causing serious harm to the Chinese economy.”
“Risk of a trade war escalation will likely keep the tremendous weakening pressure on the CNY for a while. But the rapid pace of depreciation over such a short time span sparks concerns about another round of capital flight, similar to that of 2015-16. This will prompt the PBoC to intervene, possibly at 6.70 for USD/CNY.”
“Besides the PBoC intervention, a market repricing of the CNY is possible when the market realises that Chinese growth fundamentals remain solid and the authorities have ways of offsetting the lost export demand with domestic spending. We expect the USD/CNY to trend down in 3-6 months.”
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