USD/CNY: Depreciation trend set to continue in coming years – Danske Bank

Allan von Mehren, Chief Analyst at Danske Bank, expects the CNY to weaken gradually as growth is under pressure, debt risks are rising, the Fed is resuming rate hikes and net FDI flows are no longer positive for China.

Key Quotes

“However, we do not expect a bigger devaluation as the CNY is not overvalued and China wants stability around its currency. However, against the EUR, we still expect the CNY to depreciate close to 10%+12M.”

“The CNH-CNY spread has been quite stable after calm was restored in February. We expect the spread to stay at around zero or slightly above throughout the forecast horizon. Hence, basis risk in hedging CNY exposure through CNH is expected to be limited. If the spread moves out PBoC is likely to use higher CNH money market rates (by draining liquidity) to pull it down close to zero again.”