Synopsis:

Societe Generale recommends going long USD/CNH, targeting 7.50, driven by expected tariff hikes under the incoming US administration. The trade benefits from a positive carry and potential front-loaded market pricing of US-China trade risks.

Trade Details:

• Entry: 7.25
• Target: 7.50
• Stop: 7.10
• Carry: +0.20% per month
• Time Horizon: 3 months

Key Points:

1. Tariff Risk Pricing:

   • The market anticipates aggressive tariff hikes from the US administration in 2025, likely priced more quickly than during Trump's first term.

2. PBoC Countermeasures:

   • The PBoC’s countercyclical actions, including CNY fixing, are expected to be reactive rather than preemptive, allowing for gradual CNY depreciation.

3. USD Demand from Exporters:

   • Chinese exporters are less likely to convert USD holdings into CNY amid trade uncertainty, supporting USD strength.

4. Positive Carry Advantage:

   • China’s relatively low interest rates provide an additional yield benefit for long USD/CNH positions.

Conclusion:

SocGen sees long USD/CNH as a strategic trade in early 2025, benefiting from tariff risk repricing, limited PBoC interventions, and a favorable yield differential. The trade setup offers a compelling risk-reward profile with a defined stop at 7.10 and a target of 7.50.