CNY: Stabilisation versus USD, weaker versus EUR - Danske Bank

Analysts from Danske Bank expect USD/CNY to move to the downside amid a weaker US dollar and they see EUR/CNY trending higher. 

Key Quotes: 

“We look for calmer waters for CNY: 1) Our expectation of more overall USD weakening speaks in favour of more downside in USD/CNY. 2) In the other direction, we look for a slowdown in China and US rates moving in favour of the USD relative to the CNY. The cross will be caught between these two opposing forces. We expect volatility but without a clear direction on a 12-month horizon.”

“We expect EUR/CNY to continue the trend higher. This is a reflection of our forecast of stronger EUR vs USD and broadly flat USD/CNY.”

“Relative rates serve as an anchor for FX. We expect the spread between the US and China to move in favour of the US again over the next year as the Fed hikes further and China is done de facto tightening. China MM rates shot higher as financial tightening led to a squeeze on liquidity and pushed up money market rates. At the same time US money market rates took a breather.”

“Looking forward we expect Chinese rates to be flat and eventually move lower next year while US rates are expected to increase as the Fed’s hikes feed through.”

“USD/CNY is fairly correlated with EUR/USD. Hence when the USD weakens against the EUR it also tends to weaken against CNY. The halt in the EUR/USD move has contributed to the increase in USD/CNY lately. The picture is even stronger when using the trade weighted USD. Hence a weaker USD has tended also to lead to lower USD/CNY. This force will pull in the other direction to the relative rates move shown.”

“USD/CNY: Our forecast is close to the forward market as we see the cross at 6.75 in 12M vs the market around 6.8.”

“EUR/CNY: We forecast more CNY weakness than the market. We continue to recommend hedging receivables in CNY/CNH for EUR based entities.”