FxWirePro: Yuan outlook changed from downside to upside for H2

Back in March this year, in an article named, “FxWirePro: USD/CNY might push above 7 in H2”, available at http://www.econotimes.com/, we called on our readers to short the Chinese Yuan against the dollar at the then current rate of 6.89 per dollar. We forecasted the Yuan to weaken past 7 per dollar in H2, and finally reach as low as 7.6 per dollar, especially after it reached very close to our previous forecast 6.75 per dollar (Yuan reached 6.778 per dollar) and declined.

We cited two major reasons behind that forecast,

• We expected that US tax reforms would pass in the second half of this year, which we suspected not to be pretty for China, which enjoys a very high surplus with the United States.
• Secondly, we suspected that the narrowing interest rate differentials thanks to a more hawkish Fed would weigh on the Yuan.

However, in reality, the fate of the many promises of President Trump remains clouded with uncertainties as the White House remains dogged by accusations of collusion with Russia in 2016 election. It is also getting bombarded by damaging leaks and fake news that has engulfed not only White House but Capitol Hill too. In addition to that, President Trump has taken a softer stance towards China in exchange for China’s help to tackle threats of North Korea.

Moreover, after months of hawkish rhetoric from policymakers at the US Federal Reserve, recent commentaries from James Bullard, Robert Kaplan, and many others suggest that it is once again tilting in reverse.

With these changes in fundamentals, we do change our dovish forecast for the Yuan for H2 and expect it to gain further as the dollar is likely to slide over the coming months. However, one must note that the weakness in the Yuan is likely to persist over the longer horizon and we are not canceling our above 7 per dollar forecast but postponing it.

In the shorter to medium term, we now expect the Yuan to strengthen in H2 and test the levels around 6.78 per dollar. The stop loss for this trade should be above 6.915 per dollar. Please note, 6.84 area likely to pose as big resistance for the Yuan.