CNH crosses: Bullish on EUR/CNH but trade the range for other crosses - ANZ

Irene Cheung, Senior Strategist at ANZ expects proactive central bank management and a stable macroeconomic environment in China to keep USD/CNH in the 6.75-6.90 range in the near term and while they are bullish on EUR/CNH and mildly so for JPY/CNH, but recommend trading the range for the other crosses (AUD/CNH, NZD/CNH, SGD/CNH and TWD/CNH).         

Key Quotes

“The broad stability of the Chinese economy points to a less vulnerable CNY. Our view is reinforced with the introduction of a “counter-cyclical adjustment factor” (CCAF) in the daily fixing mechanism of USD/CNY in late May.”

“We expect USD/CNH to continue to trade in the 6.75-6.90 region in the near term. On the upside, 6.90 appears to be the level at which the PBoC wants to defend the pair. On the downside, 6.75 is the support. China’s macro picture is stable but with PPI inflation easing, there is no imminent inflation risk which warrants a much stronger currency.” 

“Bullish on EUR/CNH, mildly positive on JPY/CNH

Among all the CNH crosses, we are most constructive in EUR/CNH. We see a growing risk that the ECB will reduce its monetary accommodation at some point after ECB President Mario Draghi said this week that the recovery of the euro area is strengthening and broadening, coupled with signs of resurgent reflationary pressures. To recap, the current bond purchase program of the ECB, which is running at a monthly rate of EUR60bn, will last till the end of this year.  

In comparison, Japan is behind the euro area in terms of growth and inflation outlook but the macro picture is also improving. At some point into 2018, the BoJ may also signal a reduction in its monetary stimulus. We are mildly constructive in JPY/CNH which is now trading at a key support line.”

“Trade the range for other crosses

For the other crosses (AUD/CNH, NZD/CNH, SGD/CNH, and TWD/CNH), it appears that the dynamics have changed since early 2017 following a sustained period of CNH depreciation. The crosses have been trading in a range so far this year.

For individual crosses, the current level of NZD/CNH is toppish and we favour selling the pair. In the meantime, TWD/CNH has been hovering at a key support level which favours buying the pair.”