FxWirePro: Daily Commodity Tracker - 21st March, 2022 
The main implications of China's new exchange-rate policy are that the link to the USD has weakened and the exchange rate has become much more dependent on growth and monetary policy in is not aiming for a major competitive devaluation. However, relative monetary policy between China and the US suggests that the CNY will continue to depreciate and drop close to 5% against USD in the next 12M.
In the short run, however, the PBoC is set to keep the CNY in a tight grip ahead of the IMF's decision on SDR this autumn. Hence, CNY is expected to depreciate slightly on a 1M and 3M horizon. Despite the CNY appreciation in recent years, it cannot be regarded as overvalued as i) China's share of global export markets continues to improve and ii) markedly lower crude oil and commodity prices represent a substantial terms of trade gain for China and have increased its trade surplus markedly.
"Given our call for a lower EUR/USD in the coming one to three months, driven by the beginning of a Fed hiking cycle, we expect EUR/CNY to drop back towards 6.84 in 3M as the correlation between USD and CNY will remain high in the near-term. Further out, we expect the euro to stabilise and eventually reverse some of its losses, supported by improved inflation and the growth outlook for the euro zone. We expect this, together with further CNY underperformance, to lead to a sharp reversal in EUR/CNY. We target 7.37 in 12M",says Danske Bank.
