Iris Pang, economist at ING, suggests that they are revising their USD/CNY and USD/CNH forecasts because of rising tensions between China and the US over trade and technology, but don’t expect the currency pairs to pass through 7.0.
Key Quotes
“Back in April, we thought trade negotiations were progressing well. We were wrong. China has since demanded a revision to the terms of the draft trade deal which it says are “disrespectful” to China. This move has rocked the market globally.”
“USD/CNY jumped from 6.7349 at the end of April to 6.7915 at the open of the first trading day in May. This change of sentiment means the yuan is going to depreciate rather than appreciate for the rest of the year.”
“If the People’s Bank of China were to let the USD/CNY pass 7.0 tomorrow, this would result in a depreciation of 1.33% in a single day. Exporters wouldn’t receive more orders simply because their product unit price is 1.33% cheaper, so this move wouldn’t make a significant impact on exports.”
“However, letting the USD/CNY pass through 7.0 has the potential to lead to considerable volatility in the onshore equity market.”
“As the trade and technology war escalates, Chinese policy makers are likely to aim to dampen uncertainty to the market. As such, we rule out any scenario of USD/CNY and USD/CNH passing through 7.0 unless tensions ease to a level where there is no longer any threat of a trade or technology war, something we do not expect in 2019.”
“We are revising our USD/CNY and USD/CNH forecasts to 6.90, 6.95 and 6.90 by end of 2Q, 3Q and 4Q 2019, respectively, from our previous forecast of 6.75 by the end of 2019.”
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