Analysts at Nordea Markets explain that the CNY has weakened more than 2% versus the USD during the current EM sell-off and the catalyst was the broad-based USD strengthening, which they expect will push the USD/CNY higher in the coming few months.
Key Quotes
“In addition to market forces, macro fundamentals may add to the depreciation pressure as well.”
“Excessive credit expansion is a risk for extreme currency pressure on many EM currencies. With total debt of more than 240% of GDP, credit risk might be an Achilles’ heel for China’s growth as well as currency stability. The government has pledged to deleverage to clean up bank balance sheets. However, it bears the risk of losing investor confidence through rising defaults and resulting in another round of capital flight. That would start a negative spiral and add to the weakening pressure on the yuan. This risk is currently manageable given the persistently strong macro outlook and Beijing’s cautious deleveraging process.”
“Furthermore, depreciation expectation has been defied as exporters are no longer waiting for a better timing to convert their FX income to yuan. Nevertheless, the fresh memory of the nearly unstoppable capital flight from 2015-16 will make Beijing cautious and CNY weakness will likely only be tolerated to some extent.”
Share
