USD/CNY: Devaluation not on the cards, level of 7 breached – Danske Bank

Danske Bank analysts point out that the recent escalation in the trade war pushed USD/CNY above the psychological level of 7.0 on Monday.

Key Quotes

“The likelihood of a trade deal on this side of the US election is decreasing and the risk of further escalation is increasing. We now forecast a move in USD/CNY to 7.20 in 6M and 12M.”

“We do not expect China to turn to devaluation as a weapon in the trade war. In our view, the costs would be too high and China wants to be seen as 'responsible'.”

“Hedging CNY receivables still makes sense, though, as a 'fire insurance' against a worst-case trade war scenario, in which Trump adds more tariffs and tightens export controls on China.”

“The lid came off USD/CNY and USD/CNH overnight, as the People's Bank of China (PBoC) set the fixing above 6.90, the weakest level since November 2018. USD/CNH immediately jumped through the 7.0 level, triggering stops that took the cross very quickly above 7.10 before settling down around 7.08-7.09.”

“The CNH weakened a lot more than the CNY, suggesting that the move is driven by selling in the CNH market . This market is typically used more by companies for hedging as well as by investors taking speculative positions on the CNY. The CNY-CNH spread is now at its widest spread since the market turmoil in 2015-16, underlining the selling pressure in the CNH market.”