The CNY is close to peaking as the Chinese growth cycle cools down and western economies open up in the coming months. In the short-term, capital inflows should offer some support for the CNY, economists at Nordea report.
Key quotes
“After yuan’s strong performance the PBoC would likely welcome a pause in the appreciation trend and the central bank is in no rush to tighten monetary policy in 2021.”
“In the very short-term, risks are still tilted towards slightly stronger CNY, as capital flows and macroeconomic momentum favours the CNY. However, In Q2 the US, followed by Europe, will open up and this should turn macro momentum to favour the USD and EUR, meaning CNY appreciation pressure should gradually fade. Moreover, in the coming months, rising US rates could reduce capital inflows to China.”
“The positive credit impulse has already reached its peak in China, which should be seen as a negative factor for the CNY, although this might be a story for the second half of the year. Short-term risks for the CNY include softness in the Chinese equity market, where the last couple of weeks have been volatile.”
“One could argue that continuous power struggle should be structurally negative for the CNY. In the coming years China will most likely continue to reduce the dollar’s influence on the yuan trading basket, which may allow USD/CNY to move more in the future without triggering interventions from the officials as easily as today.”
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