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It is quite usual to presume that China counters the escalating trade tensions and the prior tightening in aggregate fund support for the domestic economy by easing policy settings on the fiscal, monetary, FX, and regulatory/property fronts. Early signals are the greater preference for easier liquidity/monetary policy, side-by-side with a more limited, targeted, fiscal/infrastructure easing. The 2H’18 working assumption for the 7-day repo rate now stands at 2.80% versus 3.20% a month ago and the 1H’18 outturn of 3.04%. Inflation is not an issue.
Mounting trade tensions between the US and China have put downward pressure on the CNY and the risk of continued CNY weakness remains.
China is more vulnerable than the US in the short term, as its economy is already weakening, while China has excessively relied on exports, and the US enjoys the fiscal support and is a more closed economy.
We expect pressure on the Chinese economy to lead to further easing by the People’s Bank of China and emphasize the risk of outflows also picking up, supporting the case for a weaker CNY.
In FX Strategy – Downward revision to our CNY outlook (26 June), we revised our USDCNY and EURCNY forecasts higher to target USDCNY at 6.85 in near-term and EURCNY at 8.38 in 12M. While we maintain these here, we stress that risks remain skewed towards a significantly weaker CNY than incorporated in our forecasts.
Trade tips: At spot reference: 6.7181 levels, on hedging grounds, we advocate stay long in 2m USDCNY forward contracts with a view to arresting upside risks. These forward derivatives contracts help foreign traders manage their FX risks in the currency market by locking in the future exchange rate and predetermined date on which they would make a foreign exchange transaction.
Currency Strength Index: FxWirePro's hourly USD spot index is flashing at 21 levels (which is mildly bullish), while hourly CNY spot index was at 48 (bullish) while articulating at (13:35 GMT). For more details on the index, please refer below weblink:
