USD/CNY: Yuan unlikely to strengthen substantially further in the near term – Commerzbank

The softening in USD and signs of thawing of US-China relations have helped to strengthen the Yuan over the past week or so. Economists at Commerzbank analyze USD/CNY outlook.

Stabilization rather than a strong re-acceleration in activity

The Yuan will likely continue to strengthen should the Dollar retreat further. However, we think it is unlikely that the Yuan will strengthen substantially further in the near term i.e. for USD/CNY to move below the 7 mark.

Admittedly, Chinese authorities will probably take more aggressive steps to shore up the housing market, support property developers’ financing, and manage the local government debt problems while boosting infrastructure spending. These steps will be positive to China’s growth outlook. However, we look for stabilization rather than a strong re-acceleration in activity.

While the negative interest rate differentials between China and the US are narrowing, they are likely to persist given the divergent policy directions for the Fed and PBoC.