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Westpac analysts point out that USD/CNH and USD/CNY broke the key psychological level of 7 on 5 August, after PBoC “allowed” the USD/CNY fixing to print above 6.90.

Key Quotes

“These pairs have continued to grind higher and broke 7.10 subsequently amid an escalation of trade tensions between the US and China.”

“With the burden of ‘7’ out of the way, the flexibility for the RMB to move based on market forces and fundamentals has increased.”

“The economic backdrop – with persistent impact from tariffs on trade flows, which filters through to production and investment – argues for a stable or falling RMB basket. With our expected weakness in the EUR – a heavy weight in the RMB basket, and general weakness in Asian currencies, this outlook for the RMB basket requires some adjustment against the dollar. We expect USD/CNY to grind towards 7.20 by year end, with risk to the upside.”

“China appears willing to let the RMB weaken further to reflect fundamentals, as long as that will not trigger substantial capital outflows. In this regard, we continue to monitor various indicators including the monthly FX settlement data to gauge RMB sentiment and flows.”