Synopsis:

Goldman Sachs analyzes the recent decline in USD/CNY, which fell below 7.10 and reached new lows for the year. The move, supported by positive local news and potential increased USD selling by exporters, highlights ongoing dynamics in the currency pair and suggests that while there may be increased volatility, CNH could underperform due to domestic fundamentals.

Key Points:

• Recent Price Movement:

  • USD/CNY broke below the 7.10 level, reaching a new low of 7.0742, aided by news of China allowing refinancing on a significant portion of mortgages, boosting local equities.
  • The move has extended, with further downward pressure observed.

• Impact of Local Exporters:

  • There is speculation that local exporters and corporates may have driven the recent decline in USD/CNY, particularly as the pair remains below the 7.10 threshold, which is a key FX budget level for many.
  • Exporters are likely to increase USD selling if USD/CNY stays below 7.10, based on their budgetary levels.

• Research Insights:

  • Goldman Sachs' research indicates a smaller scale of USD hoarding than other estimates, suggesting around USD 400 billion accumulated from mid-2022 to 2024.
  • While the average cost of "excess" USD is just below 7.10, the pace of CNY appreciation is a more critical factor for exporters’ decisions to convert their holdings.

• Future Expectations:

  • Despite potential for increased volatility in USD/CNY, Goldman Sachs expects CNH to underperform within the region, primarily due to domestic economic fundamentals.

Conclusion:

USD/CNY’s break below 7.10 has been influenced by local economic measures and possible increased USD selling by exporters. Although volatility may rise, the overall outlook suggests that CNH could continue to underperform, driven by weaker domestic fundamentals.