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A rise in capital outflows would likely to drive further Chinese offshore currency depreciation. We hold the bias that the PBoC would let further weakness in CNY after the September G20 summit, as a policy reaction to the IMF’s suggestion to allow market forces to guide the exchange rate and move more towards a floating FX regime.
The growth momentum and trade surplus in China pick up in 2016, diminishing expectation on CNY depreciation.
China’s FX reserves eased modestly in August, falling $15.9 billion to $3.1852 trillion, following the modest decline at $4.1 billion in July. The decline in August FX reserves is partially driven by negative valuation effect.
Fundamentally, we are bearish in EURCNH. We expect Brexit to eventually weaken the EUR. However, this view has yet to play out given the delay in the official commencement of the breakaway of the UK from the EU. Also, CNH consolidation has helped take the pair to a high of 7.54.
We think the current level of 7.51 is toppish.
EURUSD has thus far performed better than our expectation. With Brexit now a protracted process and the Fed on a very gradual tightening path, we have upgraded EURUSD slightly, and are now looking at a trough of 1.04 by mid-2017 instead of a low of 1.03 by end-2016. EUR weakness has yet to play out.
Also, with the CNH in consolidation over August-September, EURCNH hit a high of 7.54, which has not been broken since 2015. Currently, at 7.51, the pair is toppish in our view. We will look to sell the pair closer at 7.54 and buy the pair at around 7.30, which is the support in the past six months.
Recommendation: EURCNH has been trading in a range of 7.30-7.54, which is a good guide for buying/selling the cross. At some point, a breakout is possible, potentially on the back of the US presidential election or repercussions from Brexit.
