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According to analysts at ANZ, the Chinese Yuan and other Asian currencies are being hit by the worsening trade tensions between the US and China, and the bank suggests that the gap between the USD and CNY is due to close, but only if trade tensions are relaxed.

Key quotes

“The escalation of trade tensions between the US and China have been behind the more recent weakening in Asian currencies.

Our models suggest that the Malaysian Ringgit is the most under-valued currency based on an average of the PPP (Purchasing Power Parity) and BEER (Behavioural Equilibrium Exchange Rate) bases “¦ Following the recent sell-off, the Chinese yuan is the next most under-valued currency in the region, with average fair value at around 6.00.  

In aggregate, the misalignment for USD/Asia as a whole is close to a level that has tended to signal that a turnaround may be around the corner. Hence, even if trade tensions show no sign of easing anytime soon, the extent of further Asian currency weakness may be limited from here.

(The USD/CNY sees) average fair value at around 6.00. However, with trade tensions hanging over the currency, the valuation gap is unlikely to close anytime soon.