Analysts at Nordea Markets suggest that even if trade tensions between China and the US flare up again, they see a very small likelihood of Beijing proactively devaluing the CNY.
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“Such move would be comparable to August 2015, when a revised CNY fixing model led to devaluation and followed by month-long capital flight and currency depreciation. Ultimately, the vicious circle was only brought to an end by restricting all capital movements.”
“That being said, Beijing’s reluctance to devalue does not limit the CNY’s downside risks. The CNY could be weakened by market forces, for instance continued USD rally. The CNY is currently at a two-year high, versus both the USD and the basket, and allows room for a correction. The risk is that CNY depreciation, even if it is market-driven and limited in scope, could feed into the prevailing depreciation expectation and result in another round of capital flight. Under this scenario, the biggest spill-over risk is on EM Asian FX given the CNY’s increasing influence in the region.”
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