CNY Stability: Flattening USD/CNY Forecast Amid Rising Tariff Risks
Despite a volatile fortnight in global FX markets, USD/Asia has stood out for its relatively stability with most pairs moving within a 0-1.5% range.
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CNY: Stability is here to stay, flattening our USD/CNY forecasts
Although China has faced an 10% in increase in tariffs twice this year and broader tariff risks have been rising in recent weeks, the USD/CNY fixing has stayed resolutely around 7.17 (since 20th January inauguration day) and spot USD/CNY has dropped from 7.33 early January to around 7.23 currently, bucking market and our expectations that higher tariffs on China would lead to at least some CNY depreciation.
Given the PBoC’s reaction function so far, we think Chinese policy makers will primarily rely on other tools (monetary, fiscal, housing and credit) to offset the potential adverse growth impact from US tariffs, as opposed to relying heavily on the FX lever, with the risk that the Renminbi could even move stronger as an outcome of the mooted Presidential summit later in the year.
That said, our US team have doubled their expected increase in US tariff rates, which should be negative for Asian exporters and China as well.
With more two-sided risks than before, we are shifting to a flatter USD/CNY forecast path of 7.30/7.35/7.35 on a 3M, 6M and 12M horizon from 7.30/7.40/7.40 to take into account CNY’s likely relative stability versus any broader USD move.
