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Sep 07 - 06:55 PM

MUFG: USD Rally Could Gain Momentum if USD/CNY Breaks Above Last Year's High

By eFXdata  —  Sep 07 - 03:00 PM

MUFG examines the potential impact on the US dollar's strength should the USD/CNY currency pair break above its previous year's high. This analysis comes as China's central bank, the People's Bank of China (PBoC), continues its efforts to support the renminbi (CNY), setting daily fixes at stronger than expected levels for 54 consecutive trading days.

Key Points:

  • USD/CNY Current Status: At present, the PBoC has been supporting the renminbi by setting the daily fix at a stronger than expected rate of 7.1986 for over 54 trading days— the longest streak since Bloomberg started tracking in 2018.

  • China's Economic Situation: Despite efforts to support the currency, the data shows that concerns over China's growth have not eased. A recent trade report revealed contractions in annual export and import growth, both easing to -8.8% and -7.3% respectively. The trade surplus has remained relatively stable at USD 863 billion.

  • Sentiment on Renminbi: There is increased speculation that China may allow a more significant devaluation of the renminbi to support net trade growth. However, the PBoC's actions indicate a preference for a gradual depreciation path due to concerns over stimulating sharp capital outflows.

Implications for USD:

  • USD Strengthening: If the USD/CNY breaks above its previous high, it could trigger a more robust rally for the US dollar, particularly if Chinese economic indicators do not improve. The greenback's strength would likely be compounded by any significant devaluation in the renminbi.

  • Investor Sentiment: The status of the renminbi as a barometer for broader sentiment toward the Chinese economy could make the USD/CNY pair a crucial indicator for global investors.

Conclusion:

MUFG suggests that the US dollar rally could pick up substantial momentum if USD/CNY breaks last year's high. While the PBoC continues to support the renminbi, the absence of substantial economic recovery in China makes further depreciation likely. This could serve as a key driver for a more robust USD rally going forward. Investors should closely monitor the situation, as a break above the previous high in the USD/CNY pair could serve as a significant market signal.

Source:
MUFG Research/Market Commentary

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