Synopsis:

MUFG notes the continued weakening of the renminbi amid policy moves by China to dampen the pace of depreciation. However, the widening US-China yield differential and tariff concerns point to further USD/CNY upside.

Key Points:

• Renminbi Weakness:

  • USD/CNY hit 7.3295, nearing the September 2023 high of 7.3503, while offshore USD/CNH surpassed 2023 highs at 7.3695.
  • Recent depreciation driven by anticipation of US tariff hikes under Trump’s second term and widening yield spreads.

• Policy Response:

  • PBoC set a stronger daily fixing rate at 7.1876, maintaining it below the 7.2000 level.
  • Commentary and fixes suggest China aims to prevent sharp depreciation while allowing for gradual weakening.

• Drivers of Depreciation:

  • Record-low Chinese yields contrast with elevated US yields, driving capital flows and weakening the renminbi.
  • Anticipated monetary easing by the PBoC to support domestic demand further pressures the currency.

Conclusion:

While China is trying to slow the renminbi’s decline, MUFG expects the path of least resistance to remain upward for USD/CNY, driven by monetary divergence and trade policy risks.