The CNY has become a true two-way volatile currency and by depreciating 3% against the USD this month, the CNY performed second-worst in Asia as it lost nearly 2% against the currency basket during the past week, notes Amy Yuan Zhuang, Analyst at Nordea Markets.
Key Quotes
“The CNY sell-off was initially seen as a catch up to the other EM. However, depreciation has continued during the past two weeks even though the USD has stabilised. The decoupling suggests that the market has started to price in China-specific risks, which stem from a series of disappointing macro data and the escalating risk of a trade war with the US.”
“We think the latest CNY weakness is overdone. Technical indicators suggest it has. During the past two weeks, the USD/CNY has breached many support levels, including 50% and 61.8% Fibonacci retracement. It is 1,000 pips above its 200-day moving average, and the relative strength index suggests it has not been this oversold since October 2016.”
“Fundamentals agree with the conclusion as well. Although growth momentum has deteriorated lately, economic activity remains robust.”
“As both technical and fundamental indicators point to the CNY being oversold, what is left to continue exerting weakening pressure on the CNY is market sentiment. Given the near-term uncertainty about the trade and investment relations between China and the US, the CNY weakness could persist on a 3-month horizon.”
“If market sentiment continues to drive the CNY weaker against the USD in the coming weeks, the PBoC will likely intervene. The Chinese authorities have nothing against limited weakness of the CNY but they fear another round of capital flight similar to that of 2015-16. Currently, the risk of that is small given that depreciation expectation has not yet taken its root.”
“We have recently fine-tuned our CNY forecasts and expect the USD/CNY to stabilise around 6.60 in three months before strengthening in Q4 and next year.”
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