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Allan von Mehren, Chief Analyst at Danske Bank, sees the Chinese Yuan losing further ground in the next months.

Key Quotes

“Chinese money-market rates have fallen sharply over the past few months, as the People’s Bank of China (PBoC) has increased liquidity. It contributed to the sharp depreciation of the CNY. Relative monetary policy versus the US has thus turned very CNY negative (see chart). We look for a further escalation of the trade war, with US tariffs on Chinese imports worth USD200bn in October. This would put additional pressure on the Chinese economy and points to further monetary easing. As the Fed is set to keep tightening, relative rates should work in favour of further USD strength and CNY weakness”.

“FX policy continues to be a managed peg against a basket of currencies. The basket has weakened sharply over the past few months to the weakest level since mid-2017. On 3 August, China reinstalled a reserve requirement of 20% on buying of some FX forwards in a move to stem the decline of the CNY. We see no signs that China is using the currency as a tool in the trade war. Instead, the depreciation is a result of the easing of monetary policy relative to the US”.

“We look for further CNY weakening in the medium term on diverging monetary policy”.

“We look for USD/CNY at 6.9 in 3M and 7.20 on 12M. This is unchanged”.

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