Synopsis:

MUFG anticipates that USD/CNY will continue to be influenced by external factors, including US dollar movements, yield spreads, and CNY carry trade unwinds. They project a gradual appreciation of CNY through the end of the year and into the next.

Key Points:

1. Factors Driving USD/CNY:

   • Weakening US Dollar: Continued softness in the USD is expected to support CNY.
   • Narrower Yield Spread: The difference in yields between China and the US is projected to decrease further, supporting CNY.
   • Unwind of CNY Carry Trade: The reduction in carry trade positions is contributing to CNY strength.

2. Economic Outlook:

   • US Economy: While recent labor data has raised recession concerns, robust July retail sales and positive wealth effects suggest a deceleration rather than a recession. This scenario aligns with a "soft-landing" and supports ongoing Fed policy normalization.
   • Yield Spread Expectations: MUFG forecasts the negative 10-year government bond yield spread between China and the US to narrow by one-third over the next 12 months, reducing depreciation pressure on CNY.

3. Targets:

   • September: USD/CNY is expected to remain influenced by the current factors, with ongoing strength in CNY.
   • Year-End: CNY is projected to appreciate further, reflecting the expected narrowing of yield spreads and continued softening of the USD.

Conclusion:

MUFG expects USD/CNY to trend lower as external factors favor CNY strength. The anticipated narrowing of yield spreads and a “soft-landing” scenario for the US economy are likely to support further appreciation of CNY through the end of the year and into 2025.