Trade spat not behind the yuan fall

Thought of the day

by Chief Investment Office 02 May 2018

The Chinese yuan fell 0.4% against the US dollar on Wednesday, its biggest single-day decline in two months. The move lower in the tightly-controlled currency, which some see as a potential bargaining chip for Beijing, coincided with the arrival of several top White House officials in Beijing for high-level trade talks.

But we don’t believe the yuan’s depreciation reflects a preemptive move directed at trade policy:

  • The move lower, after a two-day holiday in mainland China, probably reflects catch-up with recent USD strength rather than a shift in FX policy. China’s trade-weighted exchange rate has been appreciating, and a weaker yuan against the USD helps mitigate this.
  • Net speculative positioning in the USD has been short since last July. The USD’s recent appreciation in part reflects US 10-year yields reaching 3%, prompting investors to trim this short exposure. Net shorts fell by 15% in the week to 24 April according to CFTC data. Longer-term, we expect the USD to resume its decline, which would relieve pressure on the yuan.
  • China has been explicit in its FX policy in official documents, saying it will not use depreciation as a trade tool. Stability remains key, as any signal on yuan depreciation could lead to renewed capital outflows as domestic money looks for an exit.

So we maintain our forecast for further yuan appreciation in the coming months, in line with our broader view for further dollar weakness. We forecast USDCNY at 6.3 in three and six months, versus near 6.36 now.

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